Open banking is a new framework which is brings big changes to financial services. Open banking payments especially offer significant benefits for consumers and opportunities for businesses.
In this article, we’ll explore what open banking payments are, their benefits, the challenges they face, and the future of open banking.
Open Banking Payments: 101
Open banking is a framework where traditional Banks and financial institutions disclose customer information to authorized third-party providers through secure and regulated application programming interfaces (APIs).
This data sharing was first mandated in Europe by the PSD2 regulation, ending banks’ monopoly over data. Customers have to give their consent for data to be shared. In turn, third-party providers such as fintech companies can use this data to create better, innovative products.
The major innovation came to payments. Open banking enables account-to-account (often known as pay-by-bank) payment method. Customers that choose to pay-by-bank are transferred to their trusted bank’s interface and authorise the transaction there, cutting out the card networks. This makes transactions faster, cheaper and more secure.
Advantages of Open Banking Payments
Below are the key benefits of open banking for both consumers and businesses.
- Superior UX for consumers: Open banking payments offer a smoother and more convenient user experience with direct transfers between bank accounts that don’t require manual data entry.
- Faster payments: Transactions happen in real time, ensuring immediate fund transfers and quicker access to payments.
- Cheaper costs: By bypassing traditional card networks, open banking reduces transaction fees and overall costs.
- No chargebacks: Open banking payments eliminate the risk of chargebacks, as funds are transferred directly between accounts without involving card networks.
- Stronger security, especially compared to screen scraping: Open banking uses secure APIs and robust authentication, minimising the risk of fraud and unauthorised access.
- Customer insights based on open banking data: Provides valuable data insights, allowing businesses to better understand and cater to customer needs.
Challenges in Implementing Open Banking Payments
Building consumer trust is crucial for the success of open banking payments. Many people are hesitant to share their financial data with third-party providers. It’s up to financial institutions and fintech companies to work together to educate consumers about the benefits and the security measures in place.
Regulatory compliance is another big challenge. Open banking is governed by different regulations in various regions. For example, in Europe it’s PSD2, in Australia it’s Consumer Data Right (CDR) and New Payments Platform (NPP); in Mexico it’s Fintech Law, etc.
Financial institutions and fintech companies need to carefully navigate these rules to stay compliant and avoid legal trouble. This means they must constantly monitor regulatory changes and adapt to new requirements.
Future of Open Banking Payments
Consumer interest in open banking is set to surge in the coming years. According to open banking statistics by Juniper Research, a remarkable spike in the total value of transactions is expected. The firm projects an increase from $57 billion in 2023 to an impressive $330 billion by 2027 in open banking transactions —a staggering growth rate of 479%.
One area of potential growth is the integration of open banking payments with emerging technologies such as blockchain and artificial intelligence (AI). Blockchain technology can enhance the transparency of transactions, while AI is already being used to analyse financial data and provide personalised financial solutions.
Another trend to watch is the expansion of open banking into open finance (including insurance, mortgages, investments etc.) and then beyond traditional financial services into an open data economy.
The regulatory landscape for open banking is also likely to evolve. Governments and regulatory bodies are recognizing the potential benefits of open banking and are working to create frameworks that support its growth while ensuring consumer protection.
Final Thoughts
Open banking payments are transforming the financial services industry, beginning benefits like better UX, lower costs, faster payments. However, implementing open banking does come with challenges, such as building consumer trust, and meeting regulatory requirements.
Advances in technology and growing consumer demand are driving innovation in this space. As open banking becomes more widely adopted, it’s set to change the way we handle financial transactions, making banking more efficient, secure, and tailored to individual needs.
