There was a time in Nigeria when you had to go to a Bank to enjoy banking services. This was the time when the famous “number tally” commercials were trending. To reduce congestion in the banking hall, the banking license was released, which gave rise to what was later called the new generation bank. Some of the new generation banks now occupy what is called FUGAZ, the top five banks in Nigeria which include First Bank Plc, UBA Plc (remember that UBA Plc is a product of the merger between Standard Trust Bank and United Bank for Africa Plc), GTBank Plc, Access Bank Plc and Zenith Bank Plc.
These banks have, over the years, become old and struggle with the same problems that brought them into existence. The problems of banking hall congestion, delays in queues to receive banking services, transaction failures, high cost of financial services, and limited banking products and services are among the nightmares of today’s customers. However, to solve these problems and unlike in the past when the government took the initiative, the individual became innovative. Innovation and disruption are buzzwords in today’s banking world. Innovators have taken it upon themselves to create ways to provide financial services without obtaining a banking license. Others have developed means to provide additional support or services that banks need to fulfill their service obligations to customers.
So these days, you don’t need to be a bank to deliver financial services. how? Many operators of financial service providers have moved the rendering of financial services from the banking hall to the palm or desk of each customer through technology and innovation. Today most people have access to loans, open savings accounts, invest, order debit cards, order check books, pay bills, buy entertainment tickets or plane tickets, etc., without visiting the four walls of a financial institution. All this can be done through Applications, or called Applications (It is software designed to perform distinct or specific functions) created and supported by Financial Technology (Fintech).
Innovators prepare some of these Applications to work on the Go, in the palm of the user through cell phones, Tabs and other mobile devices; hence it is called Mobile Application. The company must not be licensed by the CBN or must obtain a license that provides the service independently or used to support the operation of the Bank is called a Fintech company.
Fintech companies identify financial frictions they want to fix and develop platforms to address them. For example, to reduce the changes in obtaining a loan, Fintech can decide to create a Loan Application that can pay a loan request in a few minutes, like the conventional model of waiting for days. Of course, the fact that the App provides a loan in a few minutes does not mean that the system bypasses the credit requirements. Still, the difference is that instead of a manual approach, through technology, the borrower undergoes a series of tests carried out in a few minutes, and based on the results of the test, the system can decide whether to grant and pay the loan or determine the proportion of the request or in some cases reject the request.
This system achieves this by using a series of algorithms (computer language) that review the customer’s Lifestyle and, through this, can determine through the Credit Score whether the customer qualifies or not. In addition, Lifestyle borrows from the past banking history (total withdrawal pattern, saving or deposit pattern, account running to overdrawn position, account balance, and what the borrower spends money in determining the result) determines the credit score.
Now keep in mind that Fintech Companies do not have a history of borrowers, so they need to establish relationships with banks that already have borrowers with a history. Then attach the platform to the Bank so they can get access to the information they need to help the system score the borrower. The company uses a popular Application Programming Interface called API to perform this handshake. While Applications serve different functions, Interfaces are service contracts between two applications. API is the spoon that Fintech uses to eat from Banks. The agreement specifies how the two will communicate about requests and responses to operations.
So imagine if Fintech now has access to customer information. Remember that the Bank must protect and protect and not disclose customer information to third parties, not even spouses. This principle of conventional banking still applies, so for Fintech to get access to it, it makes the borrower accept certain conditions that the Bank can confirm before granting access. Some of these conditions include the Bank having to show Date of Birth, Address, banking history, etc. information on your device including your contact list.
After the information according to the authority of the borrower to the Fintech, no one can control what is done, especially since it is not in any regulation. So, in order for the information not to be misused, there must be a method that maintains the integrity of all the data. Also imagine that there are many loan companies accessing the data in the Bank. Some are for loans, savings, investments, opening accounts etc. This is why we talk about data privacy.
In conclusion, the practice of securely sharing financial data between banks and third-party service providers, such as Fintechs, is called open banking. The Central Bank of Nigeria, in an effort to ensure that customer data is shared securely, recently released Operational Guidelines for Open Banking in Nigeria by March 2023.