First published 27 October, 2024
If discussions at a recent event were any indication, it seems the world is heading towards an open-data economy driven by advancements in digital technology.
This shift involves making customer data more accessible to third parties, but only with the consent of the customers themselves.
This change reflects the acknowledgment of customer ownership of their data and their right to decide how and with whom it is shared.
One significant example of this movement is open banking, a topic that gained attention during the event. Championed by various countries and introduced in Africa by Nigerian fintech and banking executives, open banking marks a significant stride towards data openness. Despite awaiting approval from regulators like the Central Bank of Nigeria (CBN), many experts anticipate it to be a transformative development in the banking sector over the next decade.
Although open banking aligns with Nigeria’s focus on consumer privacy, as evidenced by regulations like the Nigerian Data Protection Act 2023, its core objective extends beyond data protection. This model empowers customers to willingly share their financial data with other entities through technologies like application programming interfaces (APIs).
In a study by Deloitte Insight from April 2019, the concept of open banking was examined. According to the study, open banking allows customers to share their bank data with external providers, granting access to information such as income, spending habits, accounts, and transactions. This sharing is done at the discretion of the customer, who can halt the sharing at any time, without any commitments.
This approach gives customers control over who can access their financial information, potentially reshaping competition and consumer options in the credit market by enabling fintech companies and other institutions to offer personalized financial products.
Under the open banking framework, borrowers have authority over who can access their financial data, altering the dynamics in lending decisions. This shift carries significant implications, especially concerning competition and borrower welfare.
For instance, open banking can level the playing field between traditional banks and fintech lenders by allowing borrowers to share their bank data with fintech companies. This sharing can enhance the screening capabilities of fintech firms, potentially enabling them to outperform traditional banks in identifying creditworthy borrowers.
Improved screening by fintech firms can lead to two outcomes. Firstly, it allows them to differentiate between high-quality and low-quality borrowers effectively, benefiting the former but potentially disadvantaging the latter. Secondly, enhanced screening can impact competition dynamics, potentially providing borrowers with better lending terms.
However, there is a risk that the advantages of open banking, such as increased competition and borrower choice, may diminish if a fintech company gains an overwhelming advantage. This scenario could lead to reduced competition, higher lender profits, and a negative impact on borrowers.
Furthermore, challenges may arise if certain borrowers encounter barriers to sharing their data, creating an imbalance where high-quality borrowers are more likely to share data, unintentionally exacerbating lender advantages and disadvantaging other borrowers.
These complexities in the open banking landscape warrant further exploration and understanding.
Kenn Abuya,
Senior Reporter