Open banking, a relatively new concept in the field of financial technologies, is fast becoming a major source of innovation that is poised to reshape the banking industry – globally and in Africa.
By Clinton Leask, head of Digital at Pay@
Open Banking is a capability that provides third-party service providers access to consented consumer banking, transaction and other financial data from banks and non-bank financial institutions using application programming interfaces (APIs).1 Open banking allows the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers.
Open banking became formally accepted in Europe through the European Union Second Payment Services Directive (PSD2) adopted in 2015 to facilitate a better integrated, efficient, cost-effective and competitive payments market. The UK followed suit to embrace the ecosystem in 2016.2
More recently, the term open finance has emerged. This is believed to be an extension of open banking. Open finance allows third-party data exchange to affect a broader variety of financial goods and services. Unlike open banking, open finance’s scope is much wider, affecting home loan providers, consumer credit providers, investment and pension funds, as well as general insurers, intermediaries and even retailers.
Consequently, open finance becomes the next stage of open banking development.
According to the Financial Sector Conduct Authority (FSCA) Financial Sector Outlook Study3, the banking sphere in South Africa is undergoing a transformation as transactions are performed via digital channels such as online platforms and banking apps.
Although open banking and likewise a broader open finance approach has had a slow uptake in South Africa, it presents boundless opportunities for merchants, retailers and banks alike.
For merchants, open finance offers the opportunity to enhance customer relationships. For banks open finance has the ability to reach a wider market that was previously difficult to reach. Open finance furthermore has the potential to reduce banking fees – inevitably lowering the cost for consumers and merchants alike.
Consumers will benefit from new way convenient ways to pay, not only using third party service providers but even within their existing banking apps. When applying for credit consumers will no longer need to provide 3 months banks statements and can simply follow an easy to understand interaction with the credit provider to grant access to their statement history.
Open banking, therefore, enables co-operation and partnership between banks and non-banks (fintechs) in offering payment services and solutions that will improve customer experience without compromising the integrity of transactions, financial stability or financial inclusion. This will contribute to the digitisation of cash, an increase in the speed of payments and the reduction of costs to consumers.4
However, what is lacking in South Africa is the standardisation of open finance across sectors. The FSCA, after a survey, has proposed standardisation across the sector when it comes to regulating open finance.5
African legislators ultimately need to recognise the enormous potential that open finance creates for them to facilitate financial inclusion, especially its beneficial impact on access and affordability. African countries like Nigeria have embraced open banking through the introduction of standards and a regulatory framework.
With opportunities for new services and product offerings for the unbanked in Africa gaining momentum, open finance will enable the unbanked and underserved to make more informed decisions and better manage their limited resources when incomes are severely constrained, finally, enabling consumers to transact with anyone in the world opens untapped possibilities.
Furthermore, open finance has the opportunity to connect unbanked users, promises financial inclusion for gig economy workers, allows the users to make better decisions when it comes to the management of their finances.
Banks should provide access to customers’ financial information, with appropriate customer consent, to regulated third-party payment providers. Banks should grant non-bank payment providers access to their systems for the development of APIs as a safe mechanism to enable the sharing of customer data and facilitating payments.
In terms of Pay@’s footprint in open finance solutions, we recently partnered with Capitec to pilot Capitec Pay – a secure and convenient way for Capitec customers to process payments online, whether using their mobile device or PC.
Capitec customers provide their cell phone number when making a payment via the Capitec button on the Pay@ Digital Payment Suite. The customer will get a notification within their banking app to approve the transaction.
This payment method means that the customer won’t need to share their banking details with anyone else in order to initiate their transaction, just their registered cell phone number. Plus, it’s safe and secure since the transaction is processed through their Capitec banking app.
Financial institutions are seeing the fintech evolution happening right in front of them and they are embracing the change by adopting new digital innovations and alternative payment options.
Open banking is not here to put traditional banks out of business but is an opportunity for them to rise up to the challenge and take steps towards a digitally integrated, more customer-centric future.