Why Africa Needs to Count on Open Banking & Open APIs
Banks and fintechs in Africa are on an important Open banking journey. To understand where they’re going we’d have to start with three keywords.
Wins. This is one promise that everyone can count on with Open banking through APIs. One that is guaranteed to move the needle in Africa’s finance industry considerably.
Collaborators. This is how banks and fintech companies in Africa must view themselves if they want to continue to satisfy customer demand and achieve financial inclusion.
Modularization. A fancy word describing the degree to which the parts of a system can be taken apart and then put together again, a bit like Humpty Dumpty. It is also the level to which that system as a whole, can achieve flexibility and variety in its use. This is what is currently playing out in the global financial industry through, you guessed right, the idea of Open banking through APIs.
Open banking can help banks evolve, and move away from the assumption that they have to build everything themselves. Banks must realize that pretty much all of their operations need to be customer-centric.
As a model that allows financial data to be shared electronically and securely with the approval of customers, Open banking helps Banks and fintechs participate by banding together to form an API which is open to all the members of the band and as well as third parties.
An API (Application Programming Interface) is a set of functions and procedures that allow access to the features, subsystems and data of a system.
Since individual banks and fintechs cannot possibly provide all the banking and financial services themselves, they can turn to APIs to source features that they don't possess, from external parties.
This allows them to develop more innovative and consumer-centric products that meet market and regulatory needs.
For third parties, APIs offer an avenue to gain access to customer data, information sets and features that they can integrate into their own systems.
Open banking through APIs offers a model for aggregating industry-wide financial data and services, enhancing credit scoring and facilitating smart financial management. The aggregation of customer data and banking functions can reduce cost and the time-consuming process of reconciling account information, payments and other services. It also offers a pathway for discovering customer journeys in key and potential segments with a window for experimentation with new products and distribution channels too.
Understanding APIs from a Finance Context
APIs are huge players in the endgame of Open banking. A company using an API can embed the features and capabilities of other companies into its products. So a bank that does not offer a particular service, say an online payment gateway, can source a white label from another provider, Flutterwave for instance, to offer a similar service to its customers. Take, for example, how SunTrust Bank launched a payment gateway with added services by partnering with Paystack, Flutterwave and Quickteller using the Onepipe API.
In finance, APIs tend to be of three kinds.
First, the ones used for internal processes without any external access. These are called Private APIs and every major financial institution has one.
Partner APIs are those used by third-parties and banks. These third-parties often have an official relationship with the banks.
Finally, Open APIs, often called Public APIs, are those that are open to third parties and may not have any official relationships with banks or fintechs.
We’ve come to see Open APIs form the core technology behind open banking. However, most African banks are still flirting with using them for some reason. They haven’t fully wrapped their heads around providing data access to third parties with attendant trust issues regarding security in place too.
In 2015, 50% of salesforce revenue came from APIs, for eBay it was 60% and for Expedia 90%. Now imagine the value similar numbers can bring to Africa’s finance sector. The financial landscape on the continent is slowly embracing the API economy, paving the path for several products to interact, giving institutions new potential revenue streams and granting third parties the opportunity to build contextual products and services.
Building Africa’s API Economy
APIs enable Tanzanian farmers to check agric crop prices via USSD, they allow you to scour the internet for thousands of flight tickets, and ultimately, without them, you’d be quite literally stuck. Without APIs, a lot of products and services wouldn’t exist. There’d be no way to bridge standalone products to deliver new experiences and as such, forward-thinking solutions would be mere pipe dreams.
Finance in Africa is well acquainted with the gains inherent in deploying APIs, but the technology has experienced sluggish penetration. However, with more of the globe’s endeavours moving online, this is changing. The Covid-19 pandemic reinforcing a more digitally inclined world is also another chance for APIs to be more prevalent.
Mobile Network Operators (MNO) are not left out of the party, with a lot of them allowing third-party API developers to leverage useful ones. The result has been a plethora of services including messaging (USSD & SMS), billing (direct operator billing), location, and mobile money solutions.
While some African banks may continue to stall on the use of Open APIs, a few are embracing the future like South Africa’s Nedbank & Kenya’s Equity Bank who have both put out an open API.
Fintechs on the continent seem to be doing a better job of embracing Open banking and have taken up the mantle of developing Open APIs. These APIs provide access to multiple banks, mobile money wallets and other financial services that were otherwise obscure till now.
Take Transflow, the single largest banking aggregation platform in Ghana. Transflow links financial institutions and mobile money operators to merchants and their customers across Africa. The company’s average transaction value per month is a hefty $5 Million.
Nigerian fintech outfit Okra, Nigeria, provides an open API service that allows anyone to retrieve real-time financial information from a bank account to any web or mobile app. This offers a base for different applications and use cases ranging from lending to payments and even identity verification. The company recently secured a $1 million pre-seed investment after beginning operations less than 4 months ago.
Like we mentioned earlier, Onepipe.io, a unified API that integrates the services of banks, telcos and fintechs in Nigeria, helps users leverage the strength of multiple providers of financial services in Nigeria.
Dapi an Open API in Middle East and North Africa offers fintechs in the region the ability to access real-time banking data and initiate payments from any app.
It’s easy to see why some of these API fintechs like Okra have been compared to Plaid and Teller.io. Open API services that seamlessly connects users’ bank accounts to financial apps and services in the US. Similarly, Visa’s recent acquisition of Plaid for $5.3Bn is a bet on the future of finance.
African fintechs are already making a bet that the future of finance in the continent will be based on an API economy.
The API Future Beckons
The value proposition of Open banking and APIs isn't just an enhancement of what banking is today. Open banking APIs offer an arena for an astonishing amount of innovation, a way to include all of the non-banking services consumers may want in a digital world.
The worry for some is that consumers might bypass banks when executing direct transactions, leaving banks without a comprehensive view of customer transactions and the inability to maintain customer relationships. However, if banks and fintechs offer products and services that improve the life of a consumer then they wouldn't need to worry. Ultimately whoever can make the best use of the aggregated data and functions of open banking will have no concern about maintaining customer relationships.
Banking's New Normal
Open banking through an API ecosystem offers banks and fintechs in Africa the power of customer insight and financial innovation. When banks and fintechs leverage their complementary strengths by embracing open banking, by taking advantage of APIs, there is all to gain for everyone, with the biggest gainers being customers.
Open banking provides an avenue for an unlimited number of third partners to insert themselves into the process of creating and distributing a wide variety of both financial and non-financial products and services. Consequently, this amplifies the number and variety of services that can optimize consumer lifestyles.
It is impossible for anyone to predict the span of innovation and customisations that Open banking through APIs will generate. APIs are capable of taking both banks and fintechs into disparate markets, enabling them to pursue new distribution channels and find new approaches for improving the digital banking experience.
With Personalised services becoming the new norm in this ever-changing digital world, APIs will become the de facto way for both banks and fintech to efficiently confront these changing needs. Banks and fintechs will be left with the option of either adapting and adopting APIs or be left behind.
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Thanks to @ngbede for editing the draft of this post.