Open Banking: Breaking Down the Barriers for Financial Service Providers (FSPs).
Open banking is a concept that has been making waves in the financial sector since its introduction. It involves sharing customer data, with their consent, among different financial institutions to provide better services and products. While this may seem like an invasion of privacy to some people, open banking has numerous benefits for both customers and banks alike. In this blog post, we will be breaking down the barriers of open banking and exploring how it is transforming the industry by unleashing new opportunities for innovation and collaboration between stakeholders. Join us as we dive into the world of open banking!
Introduction to Open Banking
In the past, customers’ banking data has been held hostage by their financial institutions. If a financial service provider’s customer wanted to switch banks or use a new financial service, they would have to start from scratch, providing all of their previous banking history themselves. This process is not only time-consuming and frustrating, but it also puts customers at risk of losing important data along the way.
But now, Open Banking has already started to revolutionize the way people bank in Europe and other parts of the world. And there’s no reason it can’t do the same in Africa. Open Banking has the potential to make life easier for financial service providers (FSPs) and their customers alike – all we need is for the FSPs to get on board.
What is Open Banking and How Does it Work?
Open Banking is a term used to describe the use of open APIs that allow third-party developers to access financial institution data and build applications and services around it. It has the potential to revolutionize the way banks’ customers bank and manage their finances. This allows their customers to get the most out of their financial products and services, without having to go through their bank for everything.
By making data accessible to third-party developers, Open Banking has the potential to create new and innovative products and services that make managing finances easier and more efficient for these consumers.
What is an API?
An API is a set of programming instructions that allows software to interact with another piece of software. In the case of Open Banking, financial service providers’ data is made available through APIs so that third-party developers can access it and build applications and services around it. This is what we call an API-First Culture. It starts with a central hub for building and managing APIs, allowing organizations to quickly access customer data with their consent.
To facilitate this process, FSPs should have an effective API strategy in place that includes well-defined policies and processes, robust security controls, and reliable governance. Additionally, you need to invest in the right technologies and platforms that will help manage the entire lifecycle of your APIs successfully. By creating an API-First culture, banks can unlock the potential of digital transformation, such as improved customer experience, automation of internal processes, and revenue growth.
Kenya’s Open Banking Landscape
Kenya’s payment landscape has undergone many changes, like most countries. During the past fifteen years, the National Payments System (NPS) in Kenya has undergone a fast transformation. The Central Bank of Kenya (CBK) has enabled significant advancements in payment services over time, beginning with the modernization effort that resulted in the development of the Kenya Electronic Payment and Settlement System (KEPSS) in 2005 and the passage of the NPS Act, 2011, as well as the NPS Regulations, in 2014. Mobile money was introduced in 2007 thanks to CBK’s assistance, opening a new era for payment services in Kenya and elsewhere.
In light of the above, CBK released a document titled Kenya National Payments System Vision and Strategy 2021–2025 in December 2020. In this document, the regulator outlines its commitment to establishing a regulatory landscape that supports innovation, with the key being to embrace open banking and APIs. This was and still is a significant step towards promoting financial inclusion and increasing access to financial services for Kenyans. According to CBK, the idea is to define standards for API development and mandate data portability with the view that Kenya-based users will have more options and innovative solutions in the near future.
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The KNPS vision strategy sets a clear road map for Open Banking for the next five years (2021–2025). And almost all stakeholders were involved in the discussions around the strategy—talk of the payment service providers (PSPs), banks, SACCOs, FinTechs, and other end users. CBK traversed all sectors for input regarding the strategy.
Among the developments that will come with the new standards are:
While most banks still fear the risks that come with giving third-party service providers access to their customers’ data, CBK has assured all banks of a clear risk management frameworks and standards that will include providing clarity on liability and consumer protection. As a matter of fact, this is a bold initiative in its entirety. The initiative could potentially improve the efficiency and transparency of the banking sector, reduce costs for customers, and promote the development of innovative financial products and services.
Open Banking Trends Beyond Africa
From January 2018, banks are required to make their APIs available to third-party service providers under the EU’s Second Payment Services Directive (PSD2). PSD2 is a regulatory framework that aims to increase competition and innovation in the payments industry while also improving consumer protection.
The European law PSD2 governs electronic payment services. It aims to increase innovation, improve the security of payments in Europe, and aid in the modernization of financial services. Application Program Interfaces (APIs) are becoming increasingly important in many financial industries in the EU, as shown by PSD2.
What's the EU's Roadmap to Open Banking?
Banks in the EU are changing the authentication methods they offer their clients. This is in terms of security, for instance, switching out coordinate cards or tokens for mobile phone messaging or more sophisticated tokens. The EU is also creating systems and procedures that would enable banks to utilize the exclusions provided for by the strong client authentication laws for transactions with minimal risk.
Overall, most professionals in the technology and financial sectors agree that APIs will be the technical medium that allows banks to realize open banking. Open Banking has the potential to transform the banking sector and improve financial services for customers.
It will be interesting to see Financial Service Providers implement Open Banking and realize the benefits it will bring to their consumers.
Visit our blog to read on to find out Some of the Challenges and Opportunities of Going “Open”.