Path to Greater Financial Inclusion

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By Obinna Chima

Financial inclusion is on the rise globally and has been accelerated by mobile phones and the internet, a latest World Bank report has shown.

According to the report, gains have been uneven across countries.

The new report on the use of financial services also found that men remain more likely than women to have an account.

Globally, 69 per cent of adults – 3.8 billion people – now have an account at a bank or mobile money provider, a crucial step in escaping poverty.

This was up from 62 per cent in 2014 and 51 percent in 2011.

Between 2014 and 2017, 515 million adults obtained bank accounts, while 1.2 billion have done so since 2011, according to the Global Findex database.

While in some economies account ownership has surged, progress has been slower elsewhere, often held back by large disparities between men and women and between the rich and poor, it revealed.

The gap between men and women in developing economies remains unchanged since 2011, at 9 per cent.

“In the past few years, we have seen great strides around the world in connecting people to formal financial services,” World Bank Group President, Jim Yong Kim said.

He added: “Financial inclusion allows people to save for family needs, borrow to support a business, or build a cushion against an emergency.”

Having access to financial services is a critical step towards reducing both poverty and inequality, and new data on mobile phone ownership and internet access show unprecedented opportunities to use technology to achieve universal financial inclusion.

There has been a significant increase in the use of mobile phones and the internet to conduct financial transactions. Between 2014 and 2017, this has contributed to a rise in the share of account owners sending or receiving payments digitally from 67 per cent to 76 per cent globally, and in the developing world from 57 percent to 70 per cent.

Digital technology could take advantage of existing cash transactions to bring people into the financial system.

However, in Nigeria, the Central Bank and other stakeholders in the financial sector have continued to deliberate on ways to ensure the inclusion of additional 7.6 million Nigerians in the financial system in 2018.

A study by the Lagos Business School (LBS) had identified underemployment and unemployment as one of the factors of financial exclusion. The report noted that without access to steady income, the vulnerability to financial shocks also increases for the unbanked.

Hence, these already disadvantaged citizens are further exploited with access to more expensive sources of credit to address their financial emergencies.

Clearly, these challenges were among reasons why the Open Banking initiative was conceived in Nigeria.

Once such persons are onboarded onto a digital wallet or bank account, then through open data sharing initiatives, financial management tools can be used to monitor spending activities and encourage savings. Such financial management tools can also aid micro and small businesses in their operations.

Open Banking is a system that provides a user with a network of financial institutions’ data using Application Programming Interfaces (APIs).

The Open Banking Standard defines how financial data should be created, shared and accessed. By relying on networks instead of centralisation, open banking helps financial services customers to securely share their financial data with other financial institutions.

Benefits include more easily transferring funds and comparing product offerings to create a banking experience that best meets each user’s needs in the most cost-effective way.

To the Senior Fellow, Information Systems at the Lagos Business School, Dr. Yinka David West, open banking is really about providing access to financial services data through the APIs.

According to her, the concept lowers entry barriers for new entrants to the financial services ecosystem, enabling customers to easily decide who has access to their account and transaction data.

By breaking current banking monopolies, open banking was likely to help new entrants (without legacy customer data) become more competitive.

“As such, older banks will also need to be more innovative and provide more superior value propositions beyond facilitating transactions.

“The prevalence of open banking will provide a more holistic view of any customer irrespective of existing banking relationships.

Also, the promoter of the Open Banking initiative in Nigeria, Mr. Adedeji Olowe, described it as a concept which believes that banks should be open to customers.

According to Olowe, bank customers should be able to connect on the centralised platform and transact business with anyone, irrespective of the bank such person is operating.

“And a good example I will give you is that when you have an e-mail on Gmail, if you are using i-phone, you can easily connect it to your iphone and you will be seeing your e-mail. In fact, if you may not need a Gmail app at all.

“So, irrespective of the platform you want to use, there is a standard way you can connect and then you are fine. It is the same thing that Open Banking is all about.

“The idea is that irrespective of the bank you use, when you see a financial app or you want to pay on a website, you should be able to just put in your details and then you are able to connect to your bank and do the transaction you want,” Olowe explained.

He stressed that the initiative would help accelerate financial inclusion in the country.

According to him, in financial inclusion, the idea is to allow people that are less fortunate come into the financial system and carry out transactions at a reduced cost.

“Now, the challenge is that when we connect those services to the existing platforms, the platforms try to charge money because they are commercial entities, which makes the cost of financial inclusion expensive.

“Open Banking allows operators to connect to the banks directly without passing through any intermediary and the cost of connection to the bank would be free. So, the cost of financial inclusion will reduce.

“Nigeria has always taken the lead when it comes to electronic banking. We have that history of always running ahead of everybody.

“Open Banking is already a law in countries such as the United Kingdom, Europe, Hong Kong and Australia. For us, we are saying you don’t need to wait for somebody to do same law in Nigeria, but just to start now,” he added.

He also disclosed that an Open Banking Group, made up of individuals that came together to create awareness on the initiative had been formed.

To the Chief Information Officer, Diamond Bank Plc, Mr. Lanre Bamisebi, the initiative wouldrevolutionise information exchange and financial transactions in the Nigerian financial system.

According to him, banks and approved financial technology companies can easily carry out transactions using standard APIs, through this platform.

“Time to market will improve drastically which will in turn stimulate transactions volume in the country. This will certainly impact the Nigerian economy positively.

“It will provide 360 degrees view of bank customer which will provide accurate picture of customer financial position for effective retail lending.

“It could also help consumers get a more accurate picture of their own finances before taking on debt which will enable customers manage their portfolios effectively,” Bamisebi added.

Furthermore, he pointed out that anopen banking app for customers who want to buy a home through mortgage could automatically calculate what customers can afford based on all the information in their accounts, perhaps providing a more reliable picture than mortgage lending guidelines currently provide.

Open banking can also help small businesses save time through online accounting and help fraud detection companies better monitor customer accounts and identify problems sooner, he added.

“Nigeria is definitely ripe for open banking because all the banks support digital banking. A lot of transactions are now done via online and mobile channels.

“In addition, Nigeria already have the require skill, people, technology and infrastructure to drive open Banking.

“Open banking supports financial inclusion using mobile technology.  Traders in the urban and rural areas can easily transaction using smart phone or USSD codes to consume transaction or share information. It will certainly stimulate growth of financial inclusion,” he explained.

Continuing, David-West said the initiative would also accelerate consumer credit.

She noted that one of the challenges consumers face today is over indebtedness, saying with open banking, consumers can consolidate their debt portfolios in favour of a single manageable view.

“I think the benefits of open banking are good for Nigeria and it is in our best interest to adopt it is it will increase the number of financial tools available as well as provide opportunities to deepen customer engagement (for the banked) and financial access (for the unbanked).

“We also need to realise that open banking typically supports data sharing amongst regulated or verified third party providers that are not necessarily financial institutions.

“Thus, to ensure we are really able to harness the benefits of open banking and the inclusiveness opportunities, the regulatory environment needs to evolve.

“Another positive indicator for industry readiness is the access to venture capital funding and the number of incubators in key markets like Nigeria, Kenya and South Africa.

“In sum, the open banking concept is here and we have a vibrant fintech sector ready and able to build the applications, but we still need to build the appropriate data sharing standards and the otherparts of the ecosystem such as data sharing standards,” she added.