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This article was originally published in African Law & Business and can be accessed here

What does the future hold for fintechs and open banking in Africa?

Manoj Mistry, Managing Director, IBOS Association

Few businesses have escaped the effects of the COVID-19 pandemic. Banks have certainly not been immune as many of their commercial customers have felt the full economic impact of sustained lockdowns and reduced business activity. But there has also been an upside:  lockdowns have pushed bank customers to switch to online channels. As cashless transactions become the norm, digital product usage will increase. The migration to online financial services has already accelerated at a dramatic rate, creating a boom for fintechs. As these neobanks and non-traditional financial service providers have continued to expand their activities, the payments business has become truly global in the past two years. As part of that phenomenon, Africa has emerged as a new fintech hub.

An increase in international investment has led to African fintech companies expanding their services across the continent. According to Digest Africa, a database of early-stage investments, African fintech firms raised $906m in Q3 of 2021, which represents more than 60% of all venture capital invested in Africa during that time period. As the continent’s largest economy with a population of nearly 210 million, Nigeria received more than 60% of Africa’s inbound fintech investment last year, even though more than 50% of Nigerians do not yet have a bank account.

The potential is enormous, particularly in sub-Saharan Africa, a region that has long suffered from poor access to financial services: 40% of the region’s population is under 15 years of age. In 2018, the continent had just one privately-owned start-up worth over $1bn: the Nigerian e-commerce company Jumia. Today, seven African fintech start-ups have joined the unicorn club with four of them achieving unicorn status last year: Wave, a Senegal-based mobile money network; Nigeria’s Flutterwave, which offers payments services to businesses; Nigeria-based mobile payments company OPay which is funded by Japan’s SoftBank and Chinese investors such as Sequoia Capital; and Chipper Cash, a peer-to-peer payments operator that is backed by Jeff Bezos.

Pivotal to the future of the banking sector in Africa, open banking will provide third-party financial service providers with open access to consumer banking, transactions, and other financial data. This is already being achieved elsewhere through application programming interfaces (APIs), an open-source technology that allows third-party developers, such as fintechs, to access the data that is held by banks and to develop applications or services based on it. By having this seamless data connection, open banking provides customers with access to products that are best suited to their needs. In turn, this lowers costs, while facilitating innovation and inclusion.

To meet the hidden demand for open banking, however, the banking sector needs to adopt a broad range of fintech solutions. Some development has already taken place.  In December 2020, the Central Bank of Kenya (CBK) released its 2021-25 strategy in which Open Infrastructure was highlighted as one of its main strategic objectives. Two of the largest South African banks embraced open banking at the height of the pandemic. By January 2022, the number of South African banks that offer open banking services had since grown to six. Elsewhere, South African and Nigerian start-ups TrueID and Okra, respectively, have recently announced that they had received significant funding to develop open banking infrastructure.

Legislation and regulation are critical to the future of open banking. The UK and EU have already addressed this challenge. In 2016, the Competition and Markets Authority (CMA) published a report into competition and innovation in retail banking, which found that big banks dominated the market and that consumers and small businesses would benefit from increased competition. To remedy this problem, the CMA and the UK government mandated nine of the largest UK banks to implement common standards for open banking, ensuring that there were standard APIs which allow customers to share their financial data securely and to initiate transactions safely.

The EU’s Second Payment Services Directive (PSD2), a European regulation for electronic payment services, has also driven change and innovation in the sector, making payments more secure, boosting innovation and helping banking services adapt to new technologies.

Central to the CMA and PSD2 regulation is customer consent. In Sub-Saharan Africa, the regulatory frameworks that are essential for the future operation of open banking, most notably data protection laws, have largely yet to materialize. Since data sharing forms the bedrock of open banking, a strong data protection regime is critical to its success. In this context, banks take on a dual role of data controller and processor since they are both the holders of customer data and the processors of it through their own sandboxes or APIs. Beyond legislation, physical security and cybersecurity are also essential. The location of data processing and data storage are therefore critical. When an open banking platform uses a third party to process customer data, it must obtain guarantees from its data processors that they can comply with data protection mandates.

Most, if not all African countries, have yet to implement open banking legal frameworks, although regulators such as CBK have begun offering guidelines on how these platforms will operate. According to its 2021-2025 strategy paper, “CBK will facilitate development of industry wide standard for open but secure APIs in a way that guarantees access, safety and integrity of data sharing systems. These standards will include API specifications for identification, verification, and authentication; customer account information/data access; transaction initiation; and formats and coding languages for APIs. Due to the risk associated with opening up data from financial institutions to third-parties, CBK will define clear risk management frameworks and standards, including providing clarity on liability and consumer protection.

In the meantime, much of Africa’s population remains unbanked or underbanked. Following South Africa’s lead, a great opportunity exists for banks in countries across the continent to become involved in open banking solutions, thereby meeting the needs of their customers and revolutionising African banking in the process. Ultimately, African legislators need to recognise the enormous potential that open banking creates for them to facilitate financial inclusion, especially its beneficial impact on access and affordability.