Unlocking Rwanda's Digital Economy: Legal Insights on Regulating Open Banking and Open Finance for Innovation and Financial Inclusion

Introduction

The global financial sector is evolving rapidly, with technological innovations transforming how consumers and businesses interact with financial services. Open banking and open finance have emerged as central themes in this transformation. Open banking refers to the secure sharing of bank-held customer data with third-party service providers, with the customer’s consent. Open finance expands this concept by enhancing a broader spectrum of financial products, including insurance, loans, pensions, and investments, offering a more holistic financial experience.

The adoption of these models promises to increase competition, enhance customer-centricity, and drive innovation in financial services. However, they also present challenges, particularly in the areas of data protection, liability, and consumer rights, all of which require robust legal frameworks. Rwanda, like many countries, is grappling with how best to regulate these new financial models while promoting financial inclusion and economic development.

This article explores the legal perspectives on open banking and open finance and examines their current and future application in Rwanda’s financial ecosystem.

The Evolution of Open Banking and Open Finance

Open banking emerged as a regulatory initiative aimed at enhancing competition in the banking industry. The United Kingdom’s Open Banking Initiative, mandated by the Competition and Markets Authority (CMA) in 2016, was one of the first frameworks to introduce these concepts. The European Union followed suit with the Revised Payment Services Directive (PSD2), which obligates banks to open customer financial data to third-party providers (TPPs) to promote competition and innovation.

Open finance extends this model beyond banking, allowing consumers to share data from a variety of financial services, including pensions, investments, and insurance. This holistic view enables personalized financial products and services based on a consumer’s entire financial footprint.

Legal Perspectives on Open Banking and Open Finance

1. Data Privacy and Protection

At the core of both open banking and open finance is the management of personal financial data. As the sharing of this data increases, so too do concerns about its privacy and security. Legal frameworks like the European Union’s General Data Protection Regulation (GDPR) have set stringent standards for data protection, emphasizing the need for clear customer consent, secure data storage, and strong penalties for data misuse. In most jurisdictions, open banking mandates that financial institutions and TPPs implement rigorous security measures, such as data encryption and secure an Application Programming Interfaces (APIs), to protect consumer information.

In Rwanda, the Law on the Protection of Personal Data and Privacy, passed in 2021, offers a robust framework for protecting personal data across all sectors, including financial services. This law aligns with global standards and is likely to play a key role in the future regulation of open banking and open finance, particularly around consent management and data security and Accountability. In its article 6, clearly specifies that a “data subject demonstrates that he or she has consented to the processing of his or her personal data for a specified purpose.” This law highlights clearly how data controller and processor operates and their registration in different sectors, including financial sector. Everyone in Rwanda involving in the controlling or processing the personal data has to register as a data controller and/or processor; and National Cyber Security Authority (NCSA) establishes the requirement for registering as a data controller and/or processor in Rwanda.

With the rise of TPPs in open banking and open finance ecosystems, questions of liability become increasingly complex. Who is responsible if customer data is breached-the bank, the TPP, or another entity? In jurisdictions like the UK, banks often retain some degree of liability even after customer data is shared with third parties, meaning they must ensure that TPPs meet certain security and compliance standards.

In Rwanda, larks are still developing in this area, but a similar approach may be adopted. The National Bank of Rwanda (BNR) would need to define clear accountability standards, ensuring that all actors in the financial ecosystem adhere to best practices in data protection and security.

2. Competition and Consumer Rights

One of the primary goals of open banking and open finance is to foster competition. By allowing TPPs to access bank-held data, customers can benefit from a wider range of financial services tailored to their needs. However, incumbents in the banking sector could potentially stifle competition by restricting access to data or creating barriers for TPPs.

Regulatory bodies, like National Bank of Rwanda as well as Rwanda Competition and Consumer Protection Authority (RCCPA) in these areas of open banking and open finance, will need to actively monitor the market to prevent anti-competitive practices. Additionally, consumers must be protected from potential abuse, such as being overwhelmed by confusing or opaque financial products. Laws promoting transparency in product offerings and ensuring customers’ rights to easily revoke consent for data sharing will be critical.

3. Licensing and of Third-Party Providers

For open banking and open finance to thrive, third-party providers must be appropriately regulated. In the EU, PSD2 established a licensing regime for TPPs, ensuring that only authorized entities can access customer financial data. This creates a secure and trustworthy environment for innovation, as only providers who meet stringent security and financial integrity standards are permitted to participate.

In Rwanda, the National Bank of Rwanda likely play a crucial role in developing a licensing framework for TPPs. This will be essential for ensuring that TPPs comply with the country’s financial regulations and data protection laws. Cross-border data flows also need to be considered, given that financial services are becoming increasingly globalized.

Open Banking and Open Finance in Rwanda: Current Status and Future Prospects

1. Legal and Regulatory Framework

Rwanda has made significant strides in fostering digital financial inclusion, with the BNR actively promoting the development of FinTechs and mobile banking solutions. However, open banking and open finance are relatively new concepts in the country, and specific regulatory frameworks for these models have not yet been fully established.

The enactment of the Law on the Protection of Personal Data and Privacy is a major step in the right direction. This law will form the backbone of any future legal frameworks surrounding open banking and open finance. The area of payment system involves the financial service and personal data sharing, in this regard, according to the law no 061/2021 of 14/10/2021 governing the payment system, the National Bank of Rwanda has the power to regulate, oversee and supervise the payment systems and payment services being operated in Rwanda.?

2.?Financial Inclusion and Innovations

Financial Inclusion and Innovations made significant progress in expanding financial inclusion, as evidenced by its National Financial Inclusion Strategy (NFIS) which mainly focuses on agent banking, mobile banking, etc. Mobile money services, such as MTN’s Mobile Money (MoMo) and Airtel Money, have become ubiquitous, especially in rural areas where access to traditional banking services is limited. Open banking and open finance can help further these goals by enabling FinTechs to develop tailored solutions for underserved populations.

For instance, smallholder farmers could benefit from enhanced credit products based on aggregated data from various financial sources, including mobile money accounts, savings groups, and microfinance institutions. Similarly, open finance could allow for more efficient pension planning, loan applications, and investment opportunities for individuals and small businesses.

3.?Challenges

While the open banking and open finance in Rwanda is substantial, several challenges remain. Key issues include inadequate digital infrastructure in rural areas, limited financial literacy among consumers, and concerns about data security and fraud. Building consumer trust in these systems will be essential, especially in a country where digital adoption is growing but still nascent.

Conclusion

Open banking and open finance represent the financial services industry, offering opportunities for innovation, increased competition, and greater financial inclusion. However, these models also present significant legal and regulatory challenges, particularly concerning data protection, liability, and consumer rights.

In Rwanda, the legal framework for open banking and open finance is rapidly growing in practices. The country has made important progress with the introduction of data protection and laws law governing payment systems, but further regulatory development is needed to ensure a secure and competitive financial ecosystem to regulate these emerging practices. By carefully balancing innovation with the protection of consumer rights, Rwanda has the potential to leverage open banking and open finance as key drivers of its digital and economic transformation.