Introduction

In the current digital ecosystem, the necessity for adopting technologies that enhance banking services has never been greater. Open banking is transforming the way financial services are delivered, by offering both consumers and businesses seamless transaction experiences. This article will explore how open banking is a pivotal tool in the future of banking technology.

Understanding Open Banking.

Open banking is a framework that enables third-party providers, like fintech companies, to securely access a consumer’s banking data with the customer’s consent through application programming interfaces (APIs). APIs are simply digital bridges that facilitate different software systems to exchange data between banks and third-party providers.

As consumers, we experience open banking when we sign up for a service or app and link our financial account information. Open banking provides a range of services, from payment solutions to personalized financial services such as budgeting services and even simplified access to credit.

Background of open banking in Kenya.

In 2020, the Central Bank of Kenya (CBK) published the “Kenya National Payments Systems Vision and Strategy” for 2021-2025. This report highlights the future of the country’s digital payments ecosystem including the adoption of open infrastructure technologies. This report can be accessed here.

CBK is focused on implementing legal frameworks and standards, specifically regarding consumer protection in relation to sharing data from financial institutions with third parties. Additionally, CBK acknowledges that a review of APIs is of utmost importance to ensure the development of industry-wide standards for open and secure APIs in a manner that guarantees safe, and reliable of data-sharing systems.

The Data Protection Act, Cap 411C (the “Act”) was enacted to protect and ensure the right to privacy. Further, the Act mandates banks and third-party providers to maintain the confidentiality of a customer’s information even when transmitted through APIs. Particularly, section 45 of the Act, addresses the protection of personal data handled by both public and private entities, stating that the processing of a customer’s data during legitimate activities, must be conducted with appropriate safeguards and that such personal data cannot be disclosed outside the organization without the consent of the data subject.

Advantages of Open banking

Open banking has the following advantages;

1. Consumer empowerment- Traditionally, banks have had exclusive control over a customer’s financial data, but open banking changes this dynamic. Customers now have control over how their data may be used.
2. Improved transparency and informed decision-making- Open banking fosters transparency, making it easier for consumers to select financial services that align with their goals.
3. Enhanced Financial Management: Open banking facilitates better financial management by giving consumers a view of their financial health. For instance, budgeting tools provide insights into spending habits and offer investment options.

Challenges of open banking

1. Cybersecurity risk– The increased sharing of financial data raises significant concerns, as it creates opportunities for potential breaches.  
2. Data privacy– Consumers require reassurance that their financial information will be handled securely and ethically.
3. Regulatory compliance- Ensuring adherence to compliance laws and regulations presents an ongoing challenge.

Conclusion.

Open banking has the potential to drive financial inclusion, particularly in developing markets. Moreover, open banking can stimulate economic activity and improve financial well-being by narrowing disparities. However, it is important to acknowledge the existing gap in having a comprehensive legal framework for managing open banking to ensure it effectively meets the needs of both customers and banks/financial institutions.  

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