The impact of open banking on the payments and lending landscape

by | Fintech Trends Series

In December 2022, Aaron Prosser joined us to gain insights into the fintech industry in Africa. Aaron is part of the Australian-based Beyond Payments team, the company specialises in helping businesses recover all card processing fees in a fully compliant manner.  

While with us, Aaron took a deeper dive into the topic of open banking and how this is set to shape the lending space in Africa and beyond.  Let’s have a look at some of his findings:

Problem statement:

Finch Technologies is on a journey of building out the full rails for its lending ecosystem with its digital onboarding solution Gathr. An intrinsically important next step of this journey is understanding and accommodating payments in the lending space. Let’s explore how this may be achieved.

Understanding Open Banking Payments:

The whole concept of ‘Open Banking’ aims to open up consumer banking data and therefore redefine the way consumers, businesses and banks work together through application programming interfaces (APIs) so that third parties can offer new financial services.

A component of open banking which has an abundance of potential is payments. Open banking is revolutionising the way we pay around the world with many arguing that open banking payments are quicker, easier, cheaper and more secure than current traditional payment methods.

Open Banking – How it works:

Payment Initiation (PI)

Payment initiation is a type of payment method facilitated by open banking. Put simply, it involves customers allowing third-parties to connect to their banks and authorise payments directly from their bank account.

How Open Banking Works

Open banking is the practice of enabling secure computer system and software exchanges in the banking industry, this is done by allowing third-party payment services to access this transactional data and other data available from banks and financial institutions. The third-parties are able to access this data through application programming interfaces (APIs). So instead of customers having to search for debit or credit cards, manually type in numbers, or even open up their banking app, customers can make transfers and payments instantly without having to log in to your bank, you can simply say ‘send R500 to Fred’

Benefits of PI for lenders

By facilitating a convenient, innovative and reliable method of repaying loans, a lender can enjoy lower rates of default, higher rates of customer satisfaction and consequentially greater levels of client retention and referral. Here’s how…

Customer benefit = business benefit

Benefits of PI for lenders

Limitations of Open Banking Payments

Undeveloped Functionality

Currently, in the UK, it is not possible to set up variable, repeated, automated payments using open banking. So open banking is not a substitute for direct debit – at the moment. However, this situation will likely change in the future as new regulations require the banks to provide this feature.

Lack of interpersonal relationship with customers:

Until now there has been an apathy or lack of credibility on the part of customers towards Open Banking. It is partly due to the fear of sharing their data, as well as to their lack of knowledge of how it works.

Low customer credibility

Since everything is handled digitally, the face-to-face encounters between customer and lender are becoming more scarce. For lenders, and all businesses for that matter, a lack of interpersonal relationship can lead to a breakdown in the psychological relationship and brand loyalty between customer and lender, ultimately leading to poor customer retention and referral.

Current Activity & Progress of PI

Rapid Payment Programme (RPP)

The South African Reserve Bank has articulated its vision and goals to strengthen the National Payment System (NPS) and intends to utilise Open Banking Payments through an API Enabled Rich Messaging (ISO 20022) system labelled the Rapid Payment Programme.

According to PWC, it’s set to “deepen digital financial enablement via an accessible and inclusive cashless payment option that is viable for all”

Alternatives to Open Banking Payments

Direct Debit / Debicheck

This is the traditional payment method that lenders enact for debt collection. Debicheck is simply a debit order application that adds consumer control.

Potential Future Ideas for Open Banking Payments in the Lending Space

Since open banking allows better customer banking transaction transparency, the possibilities for potential applications are endless:

  • Personalised Payment Initiations that utilise transaction analytics and take into account the customer’s lifestyle and payment history (e.g., when they pay their mortgage is triggered by when they get paid).
  • 3rd parties may be able to create logic which warns consumers of upcoming obligations triggered by irrational or ‘unsafe’ transaction activity. This monitoring of transaction will act as a coach for consumers and ensure they have enough money in their account to repay debt obligations.

*the content above are the thoughts and insights from Aaron Prosser with edits and added insights from Ashleigh Butterworth.

Is this the next big wave in Africa? We set out to find out for ourselves what the future of open banking looks like on the continent.

Game changers in African open banking

Although it may seem that regulators and banks in Africa are warming up to the idea of sharing customer data with fintech upstarts, we still have a long way to go before we develop a comprehensive open banking framework that competes with international players.

Financial analysts believe that open banking could be the biggest game-changer since the mobile money spike. Open banking provides the ability to serve unbanked individuals and SMEs, and could very easily be the key driver towards financial inclusion. Sharing of APIS enhances contactless payments, further pushing down the cost of transactions, and for those who lack affordable credit, it presents an opportunity to further eradicate financial exclusion.  

Africa is prime soil for fintech growth, mostly because consumers are in dire need of easy-to-use, safe and innovative financial platforms, this coupled with the rise of mobile penetration is a recipe for open banking success. Open Banking thrives on data, and due to the size and diversity of available consumer data in Africa, it’s the ideal place to benefit from open banking and open finance.  Although the continent still has to make huge strides before it can compete with the likes of UK and the US, there are a few nations who are dipping their toes in the water and gearing towards digital transformation and the need for open banking.

South Africa – Although Mszansi has had a slow uptake in the open finance approach, the Financial Sector Conduct Authority has seen the value in taking notice. After a national survey, FSCA has proposed standardisation across the sector when it comes to regulating open finance. 2020 also saw the establishment of an innovation hub which is a collaboration between the South Africa Reserve Bank, several government agencies and the Intergovernmental Fintech Working Group (IFWG). This hub aims to advance experimentation and innovation in fintech. Another startup making a mark in this space is truID, which after significant funding is leading the way by creating an open banking infrastructure ecosystem in South Africa.  

Nigeria – Nigeria has seen the earliest and biggest uptake in driving this model forward, with Open Technology Foundation (OTF), a not-for-profit organization, creating the Open Banking Nigeria initiative in 2017 with the aim to drive the country’s adoption of common API standards. In May 2022, the Central Bank of Nigeria (CBN) issued the operational guidelines for Open Banking in Nigeria. Although it was a huge endeavour and one that has been ironed out completely, the guidelines took into account the views of fintech startups, industry stakeholders, global players and Nigerian consumers. The aim of setting out such guidelines is to give structure to how data should be shared within open banking, including requirements for accessing data and APIs.

Kenya – a nation that’s all about forward-thinking in the payment sector, the Central Bank of Kenya released their five-year digitalisation plan to shake up the payment industry back in 2020. In addition to that the National Treasury and Planning department has drafted a policy for digital finance with open infrastructure and regulating these financial systems being core features.

What’s on the horizon for African open banking?

Although Africa has huge potential, unfortunately legacy banks are still hesitant, and not fully equipped to open their APIs to fintechs or share any of their data with their competitors. Kenya and South Africa, are also the only two African countries with solid data privacy and protection laws, which restricts open banking from going mainstream across the continent.

The solution will be to continue to push innovation hubs and organisations forward that support this narrative and want to have a significant mark on the next step in African banking. Africa needs to gear up for the revolution and to make that possible legacy banks need to jump on board.