Hi! Let me jump right into it.
I have been working in the banking/financial industry for about a year now. I have worked in projects related to software development for one of the leading African banks. With that, I gained some insight into the African financial landscape and the concept of open banking was particularly interesting to me.Thus, I decided to have a look at what it is, how it works and, being proudly African, what it means for the rising startups in the African continent.
What is Open Banking?
To understand what Open Banking is we need to understand why it came about.
Before Open Banking, it was found that the banking industry was dominated by the older already established banks and that you, as a new player in the banking arena, had it specially difficult to break through into the industry, much less thrive in it. This meant that customers did not have a lot of choice or control over their money or financial services provider.
Out of this, Open Banking was born.
In 2015, the European Parliament published the revised Payment Services Directive (known as "PSD2") which aims to promote the development and use of innovative new technologies for online and mobile payments. Additionally, in 2016 the UK Competitions and Market Authority mandated that the 9 largest UK banks allowed their data to be accessed by licensed startups, down to the transnational level. A ruling that only came into effect in 2018.
So, what does this all mean?
It means that, through consent given by the customer and properly secured channels, you can access a customers financial information and provide your financial services. This is a great advantage for startups because they will not have to compete with the large banks for customers, sharing the client-base instead. This also enables banks to become ecosystem drivers by acting as a platform on which other businesses can thrive.
How does it work?
Straight forward?? -> public API's.
The banks have published public API's that you can connect to and use to develop your services leveraging off their infrastructure and data.
What does this mean for the African startups?
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Greater scalability and customer experience
Speaking from my own experience (in Mozambique), one of the biggest pain points for startups is payment integration. Only recently have we had a local payment gateway (M-Pesa API) available. Before this, most startups had to receive payment outside the app (Cash, transfer, etc) leaving little control over the cash-flow and limiting your scalability.
Of course, there are services like Paygate that can help you out if you are based in South Africa,but if you aren't then you face a much bigger challenge. -
Cheaper goods and services
Exposing Open Banking API's can also mean that the goods and services provided by startups can be cheaper and, therefore, more accessible.
By integrating with local banks startups no longer have to be subjected to hefty international transactions fees (like they would if integrated to paypal for example) because transactions are now made locally (within the same market).
But, what are the challenges?
Mainly:
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Poor smartphone/technological penetration
It is no secret that the African population is poor. As a consequence, very few have access to smartphones and much less, internet. Africa's internet penetration is about 35%, well below the world average of 54% according to Internet World stats. So if your startup is a smartphone or web app (let's face it, most of them are) your clientele is significantly reduced.
But all is not lost as USSD apps have been revolutionary. -
Majority of the population is unbanked.
In addition to a significantly small percentage of the population that have internet access, an even smaller amount have a bank account. According to this study by McKinsey
"Africa’s retail banking penetration stands at just 38 percent of GDP, half the global average for emerging markets"
Meaning that even though you can accept payments, only a few people are actually able to pay.
With Open Banking, financial inclusion no longer has to be driven solely by the Banks, with rising Fintech startups able to participate more actively in the effort. -
Poor supporting legislature
Will the African countries adopt PSD2 or something similar? What about Data Protection laws?
A lot of African countries do not have legislature to govern internet transactions and information, but a small amount is starting to recognize the importance of regulation within the internet space. Governing of data and electronically processed transactions is starting to appear in parliaments and starting to be recognized as an important safeguard to the development of what is a new and revolutionary industry.
In spite of the challenges, the future is bright and the road is lit with signs of encouragement.
Let me know what you think.
H
Top comments (2)
The use of USSD apps is fascinating. I've worked in banking for over a decade in the UK and seen amazing advances in use of tech in that time. But it's easy to forget that the basic hardware and infrastructure just isn't there in other areas for the same line of development. Really good read.
Thank you Alan.
The use of USSD apps in Africa is becoming more exciting by the day. Specially because, here, they provide the largest reach. People are really stretching the boundaries of what we thought was possible to do through them.