Reserve Bank research finds open banking excludes the underserved it was meant to help

Open banking in South Africa has created a fintech ecosystem that excludes large portions of the population it was designed to serve, according to a Reserve Bank working paper published this week. The system, which allows financial institutions and third-party providers to access consumer banking data with permission, has driven innovation through companies like Yoco, Lulalend, and platforms built on M-PESA rails. But adoption patterns reveal structural gaps.

Open banking works by letting users share banking information between financial institutions through secure application programming interfaces, which are technical protocols that enable different software systems to communicate. The model enables startups and technology companies to build products without maintaining banking licenses, leveraging existing infrastructure to offer payments, lending, and account aggregation services.

The working paper, authored by Lwanga Elizabeth Nanziri, Paul Terna Gbahabo, and Daniel Ofori-Sasu, analyzed user demographics and found that adoption concentrates among middle-aged, employed, educated consumers. Women comprise 59 percent of users, and urban-rural distribution appears balanced. Regional breakdowns tell a different story. Gauteng and Western Cape lead adoption while Eastern Cape, KwaZulu-Natal, and Limpopo lag significantly.

Digital literacy and technology access constrain expansion. South Africa's mobile penetration and digital engagement create favorable conditions for open banking, but the authors argue that algorithmic decision-making and platform dependency may reinforce existing inequalities. Credit-targeted models show particular exclusionary effects, as thin credit histories and limited digital skills disadvantage participants.

The research compared South Africa's market-driven approach to 15 countries including Singapore, the UK, Brazil, and Nigeria. Six nations including South Africa, Kenya, New Zealand, and the US opted for market-led frameworks. Singapore uses a hybrid model. Canada is transitioning from market-driven to regulated. The EU, UK, Australia, and Brazil mandate participation and establish interoperability standards.

The authors recommend moving toward a regulator-led or hybrid model anchored by the Reserve Bank. Proposed elements include mandatory data-sharing standards, consumer consent protections, application programming interface interoperability rules, and parallel investment in digital literacy. The Protection of Personal Information Act provides enabling legislation, but gaps exist around third-party providers and APIs that fall outside current regulatory scope.

The Bank is drafting payment system legislation that could add 0.5 percent to GDP growth through faster, cheaper digital transactions. The 2030 strategy elevates payments modernization alongside price and financial stability objectives, estimating R30 billion in annual cash-management costs that could be reduced through digital infrastructure. Real-time settlement systems, digital wallets, and new payment rails form the technical roadmap.

The East African Community Cross Border Payment System Masterplan includes South Africa's work on open banking. Kenya and Rwanda signed a license passporting framework last week, allowing payment providers licensed in one country to operate in the other without duplicate regulatory approval. The agreement signals regional coordination on interoperability standards.

Policy and competitive implications

The market-driven approach favored fintechs serving digitally literate urban consumers while leaving rural and credit-thin populations underserved. Moving to mandatory participation frameworks would force incumbents to open APIs to competitors, fundamentally shifting competitive dynamics. Banks currently control which fintechs access their infrastructure and can price these partnerships to limit competitive threat. Mandated access removes that lever.

Established banks face conflicting incentives under regulated open banking. Allowing third parties to access customer data enables those platforms to comparison-shop products, potentially commoditizing lending and payments. But refusing to participate risks regulatory penalties and reputational damage. The optimal strategy involves compliance at minimum viable scope while building proprietary experiences that customers cannot replicate through aggregation platforms. Banks that excel at unique high-value services retain customers even when data portability increases. Those competing primarily on inertia face pressure.

The Eastern Cape and KwaZulu-Natal adoption gaps reveal infrastructure dependencies. Open banking assumes reliable internet connectivity, smartphone ownership, and digital literacy. In regions where these conditions fail, the technology cannot drive inclusion regardless of regulatory framework. This suggests complementary investments in connectivity and education must accompany open banking mandates. Without that coordination, regulatory changes shift who profits from serving the already-served rather than expanding access.

Fintechs building on open banking infrastructure face business model fragility. If banks currently provide API access voluntarily and regulators mandate it with price controls, current revenue models may become unviable. Platforms charging merchants for conversions could see margins compress if forced to pass savings to consumers. The regulatory transition period determines whether existing fintechs consolidate advantages or face margin erosion.

Regional interoperability through frameworks like the Kenya-Rwanda passport system creates network effects that reward scale. A fintech holding licenses in multiple connected markets gains distribution advantages over single-country operators. This favors well-capitalized platforms that can absorb multi-jurisdictional compliance costs. Smaller innovators may struggle to compete unless regional standards reduce entry barriers enough to offset scale disadvantages. The design of passporting rules determines whether they promote competition or accelerate consolidation.