With this primer, you’ll get more details on:
- What open banking is?
- The advancement of open banking (open finance).
- The one benefit of open finance.
- How Okra makes any company a fintech in 5 minutes.
What is Open Banking?
At about 8 PM, on the 2nd of November, 1707, Admiral Cloudesley Shovell died in a ship crash. He was a brilliant leader with many accolades to his name, but that night he died alongside 2,000 sailors due to poor advancement in navigation technology.
Although this was a terrible disaster, it formed the bedrock of innovation. Motivated by this, the United Kingdom launched the Longitude Act to put an end to such tragedies. This act opened up the acceptance of contributions from everyday people and not just scientists. Finally, a robust framework was provided by a clockmaker.
The process applied by the Longitude Act is today referred to as Open Innovation; a term coined by Henry William Chesbrough. Henry is a modern-day organizational theorist. His framework for innovation countered the idea of secrecy and preservation of information in silos. It nudges cross-sharing, which helps build collective intelligence for the advancement of individuals, companies, and societies.
As you might have guessed, open banking draws its operational structure from open innovation. It opens up a pathway for banks and third parties to easily share information with each other. That way, financial institutions, other businesses, and customers get the best possible experiences based on decisions backed by data.
For the sake of detailed definition, open banking is:
“ A banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks through the use of pathways known as application programming interfaces (APIs).”
With open banking, businesses are avoiding crashes and consumers are also not getting drowned by unfair exclusion. Let’s paint two scenarios here:
John works a steady job that earns him $3,000 per month. He has been at this job for three months and needs some credit. Company X feels he is a good match and proceeds to process his loan application after some regular checks. Two months down the line, John starts to default on payments.
Building upon the tenets of open banking, firms can better avoid such mirages of fit customers. At Okra, for example, we offer an income profiling service. That way, you see the full income picture/history of a potential customer (once they approve) within seconds.
Data Control Ease
In an alternative scenario, imagine John has three accounts and is good with paying off his debts. However, he has struggled with getting bank statements from his major account. So, he cannot apply for the amount of credit he wants.
The difference here is that the chances of a successful application are unfairly reduced due to an information silo. With open banking, John has control of all his transaction data and can permit access by simply linking the lender with his bank’s data through Okra.
In summary, we can see clearly how open banking makes things easier for both businesses and customers. Interestingly, with open finance, the applications get even broader. For your knowledge notes, the concept is quite modern with the first government backing coming from the United Kingdom in 2015.
Although, it is important to note that early open banking practices came with many challenges beyond limitations to banking information. Some other challenges include taking too long to deploy, in some cases as long as a 5-year project, and high costs for banks (e.g a third of UK’s financial institutions spent over £90m on Open Banking individually.)
Today, there’s an aggressive push in the UK/EU towards open finance and beyond open banking. Here in Africa, Okra is pioneering Open Finance space for Africa, by leapfrogging the old open banking practices directly to an open finance economy.
Okra’s Open Finance platform eliminates this cost for the government (tax payers) and banks. Okra’s platform allows banks to focus & invest resources in creating more direct value for customers & grow their market share.
Open Finance: Digitizing Finance for Everyone
The entire drive of open access is built upon various data infrastructures. As shown earlier, the starting point is with banking data. However, humans interact financially with various platforms that are not banks.
For example, there are payroll services across the world that make it easier for companies to process payments. In that cluster of service providers, we can find more accurate data for income patterns than we will with just a bank. If we take this further, we will see that every interaction point for people is a data source. The online cab service platform is another data source on spending patterns.
In its entirety, financial data extends to insurance providers, retailers, and even utility companies that process payments for electricity and waste management. So, open finance is the aggregation of financial data points from the bank and non-bank sources. And this aggregation provides a wider view of the financial patterns of individuals across the world. Also, it provides insights on how to better improve access to key financial services for certain people.
Key Benefit of Open Finance: More Money for Everyday People
As a salaried worker, it is easier for one to access loans from a provider. However, imagine an Uber driver who has no steady data on how he earns with his bank? Such a person is locked out from access to loans whenever they need them. Hence, even in a life-threatening situation, they won’t have a good chance of getting the cash they need to survive.
For clarity, the driver in our example has a bank account and for the standard definition of financial inclusion, they are included. However, we can see how the lack of credible data will exclude them from accessing a loan whenever the need arises. Here is where open finance steps in.
With help from Okra, using our income product, we have made it easier to accurately predict the income patterns of an individual. This is regardless of whether they earn salaries or not. Leveraging on our powerful data infrastructure, that goes beyond just linking with banks, you will be able to call up the needed income patterns to vet an individual before you qualify them for a loan.
This use case is one of the many ways open finance contributes to financial inclusion, which in turn puts money in the hands of those who need it most. As expected, this in turn improves the status of businesses. Beyond the offering of digitized financial services, you get to unlock new markets that take your revenue to new levels.
How can we Help?
In recent years, we have observed the growth of the financial space with almost every company on the path to becoming a fintech. Online shopfronts now offer loans to clients, restaurants have gone on to build digital wallets that hold cash for customers, and many other examples.
The success of all progressions towards digitized financial services has been hinged on powerful APIs that do the heavy lifting; making it possible to build financial services/features with little to no code. At Okra, we offer a suite of these APIs. They help with:
- seamless integrations with your customers’ financial data.
- the verification of ownership to prevent fraudulent use of financial data.
- predicting income patterns to help you build personalized services.
- understanding transaction patterns in simple English.
- real-time automated payments with a 99.9% success rate.
As we wrap this up, get started with building impactful financial products with our plug-and-play open finance platform here. It takes 5 minutes to set things up. Finally, it is great to state ahead of that we put your profitability first. So, for every transaction you make with us, you only pay when it is successful (which happens 99.9% of the time).