Article by Murray Gardiner, MD of Bluecode Africa
Since taking off in Europe a few years ago, Open Banking has been successful in its aim of fostering a more dynamic and customer-centric financial market. In the UK alone, more than two million people and small businesses are using open banking enabled services. As well received as it’s been there, however, it has even greater potential for Africa, especially when it comes to unlocking the continent’s vast informal markets.
Essentially, Open Banking uses secure application programming interface (API) integration with banking systems and mutually-agreed security and technology protocols to let consumers expose their banking data to third-party fintech providers for new and innovative financial products and services.
That’s markedly different from the current African status quo, which favours digital mobile payments modelled on the person-to-person (P2P) three-party payment innovation pioneered by Safaricom’s M-Pesa mobile payment. In fact, M-Pesa is now a de facto payment scheme in East Africa, having secured market dominance by exploiting its first-mover advantage in Kenya. Any two M-Pesa customers can pay each other instantly through SMS messaging.
That kind of success, however, is unlikely to be replicated elsewhere as banks roll out their own siloed QR digital payments. Under this system, all three-party payments are limited to a single ecosystem where the payer and payee are both users of the same mobile network operator (MNO) or bank. Not only does this mean that no single provider will have market dominance, it also makes payment between different, siloed financial institutions more challenging. While instant payment and settlement gateways circumvent some of these challenges, they don’t provide anywhere near sufficient levels of interoperability, especially when it comes to merchant payments and acceptance of digital payments by businesses.
The continent’s best hope for real interoperability, therefore, is a four-party Open Banking digital mobile payment scheme.
Opening the loop
Before digging into the benefits Open Banking can offer, it’s worth remembering what we mean by four-party payments. Simply put, a four-party payment is where different financial institutions agree to a common set of rules for the clearance and settlement of a defined payment type. So, a customer from Bank ‘A’ can pay a merchant who banks with Bank ‘B’, without either bank or merchant knowing (or caring) who banks with whom. The payment just works.
Such account-based, card-free, open-loop payments work best in an Open Banking environment. In order to create that environment, the participating financial institutions need to agree to a set of rules.
From there, they can expose access to the customer account through secure APIs which are approved as an acceptable standard compliant with local regulation, security, and data protection protocols. This allows banks to then provide their merchants and their customers with access to a digital option to pay at any merchant that displays acceptance of the payment type by any participating bank.
Regulation is a requirement
It’s important to note, however, that financial institutions should not just be left to their own devices when it comes to implementing Open Banking. Regulation and supervisory guidance are also critical. This is especially true given that the “winner-takes-all” culture of most big banks isn’t consistent with Open Banking principles. As a result, a “carrot and stick” approach may be needed to create a more level playing field, breaking up the established legacy arrangements that Open Banking aims to disrupt.
Even with regulations in place, giving customers the option of providing access to their accounts to third-party fintech, in particular for digital payments, is a powerful market demand-led intervention that can generate more innovation and competition as well as a better end-user experience. For their part, established banks can choose to either be disrupted by new players or align with fintech to bring their customers a richer, more valuable, payment experience while creating deeper banking relationships for both customers and merchants.
Unleashing Africa’s informal markets
Open Banking could represent a radical, and important, departure from the usual way of doing things in emerging markets, where financial inclusion has traditionally been focused on the consumer. If implemented properly, it could unleash the dormant potential of Africa’s informal markets.
Across the continent, more than 50% of GDP and employment come from the informal sector – traders, artisans, producers – and through innovation that is completely unseen by the formal financial sector. With Open Banking in place, businesses in this sector could achieve a level of transparency needed for them to build formal relationships with financial institutions.
This, in turn, gives them access to services such as insurance, savings, transactional banking, and lifestyle-related services. It’s here that informal businesses will realise the value needed to move away from cash, which has traditionally been preferred for cultural and privacy reasons.
Open Banking doesn’t just act as a cash replacement, allowing merchants to accept digital payments. Instead, it acts as a gateway to formal financial products and services. The more formal finance that can be provided to a small, medium, or micro enterprise (SMME), the greater the opportunity to grow the business and contribute to wealth creation, jobs and a mutually beneficial relationship between the enterprise and formal finance. The more growth these businesses experience, the bigger the addressable market will be for financial institutions too.
Combining Open Banking principles with four-party digital mobile merchant payments operating off the card rails, and unaffected by the costs, physical limitations and shallow penetration of legacy cards, could therefore be pivotal when it comes to advancing digital transformation and financial inclusion in the informal economy. This formalisation will give more people access to essential financial products and services and help unlock the immense potential contained within Africa’s informal economy.
Bluecode Africa is focused on providing technology to facilitate safe payments where no customer data is compromised, to help grow business and provide digital transparency.