5 minute read

Why open banking is going to have ripple effects worldwide

Friday, May 13, 2022

5 minute read

Open banking is accelerating across the UK and is predicted to impact payments worldwide over the next few years. But what exactly is open banking, and what are its benefits for your business and customers?

In this article, we dive into the technology that opens up banking data to third parties, the difference between Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), and how open banking will impact the future of commerce.

Simply, open banking is the practice of allowing third parties direct access to consumers' banking accounts and financial data. This access is possible through technology known as application programming interfaces, or APIs. Open banking APIs enable banking data to be transmitted directly to a third party from a financial institution with the consumer's consent.

Historically, for businesses to accept payments from a consumer's bank, both the merchant's bank and the consumer's bank had to participate in a third-party network. With open banking, however, all banks are required to provide open access to their accounts and financial data. Now businesses can accept bank payments from customers no matter where they bank.

By 2024, the number of individuals in the UK using open banking is predicted to reach 63.8 million. This technology has already taken off in countries such as South Korea, which had over 20 million users in 2021. In the US, the president signed an executive order signalling its commitment to open banking. And a number of other countries are putting their stamp on what open banking will look like in their markets.

Open banking service providers: AISPs and PISPs

When the European Union passed the Payment Services Directive (PSD2) in 2018, it designated new categories and rules for third-party service providers to access banking accounts and financial data with users' consent.

Under PSD2, open banking service providers fall into at least one of two categories:

  1. Account Information Service Providers (AISP)—AISPs retrieve account data provided by banks and financial institutions through APIs. Experian Boost, for example, is an AISP. Its financial management app provides users with ways to boost their credit scores, track their loans, dispute late credit card payments, or view their accounts—all through a single user interface.
  2. Payment Initiation Service Providers (PISP)—PISPs use APIs to generate payments into or out of a user's account. For example, HM Revenue & Customs (HMRC), the UK's tax, payments, and customs authority used a PISP during the 2021 UK tax season to allow taxpayers to pay their self-assessment payments through open banking services. Many of these taxpayers received their refunds in record time, while HMRC reduced its costs, turnaround times, and streamlined its payment process.
"These open banking initiations are faster, smoother, and provide consumers with better financial management while giving businesses more opportunities to innovate and expand their services," said Nick Corrigan, president, Europe, at Global Payments.

Consumers gain more control over finances

Open banking is the basis for giving consumers more control over their finances than ever before. Gone are the days of managing finances via a single financial institution. These open banking services offer customers:

  • A better user experience. Consumers can simply authorize payment with their existing and known online banking credentials, reducing friction in the payment process. Open banking payments go directly from consumers' bank accounts to merchants' in real-time.
  • Save money on fees. Consumers may see incentives to use be more apt to pay through open banking technology because it could save them money on interest rates and account fees.
  • More security. Multi-factor authentication (MFA) and a face ID or fingerprint provide advanced account protection for consumers.
  • Potential to receive new and integrated services, helping consumers interact and transact with businesses more simply and easily. This is the concept of open finance, built on open banking. A financial service may use open banking to offer ways for its customers to manage their spending or apply for a new line of credit, including buy now, pay later or automatically switch energy providers dynamically.

Businesses stand to gain a lot, too

Open banking accounts and payment initiations offer benefits to businesses, small and large, including:

  • Lower costs. Businesses will realize a reduction in costs associated with interchange fees of credit cards or network fees of third-party bank transfers on open banking payments.
  • Faster funding. Settlement time can be instant, unlike credit card processing, which can take up to three business days.
  • A more seamless customer experience. Customers don't have to input card details manually or trust a website to store their sensitive data. They select their bank and approve their purchases with their existing and known secure online banking credentials.
  • A unique customer experience. Businesses can leverage data aggregation to personalize the customer experience they provide, making the relationship one-to-one rather than one-to-many.
  • Increased security. Extra layers of security—like multi-factor authentication (MFA) including advanced biometrics technology—reduce the risk of fraud. Because of this added security layer, there's a lower instance of fraud and fraud-related disputes. A Microsoft study shows that MFA alone blocks 99.9% of cyberattacks.

Opportunities for issuers to innovate

Corrigan said open banking is a great opportunity for financial institutions to create innovative services customers want. Open banking promises to improve financial transparency and collaboration, allowing issuers to:

  • Build new business models.
  • Create more value for customers.
  • Grow customer loyalty by capitalizing on data they already possess.

A recent example of an issuer-led open banking platform is Mastercard's Finicity. Finicity aggregates real-time data to help businesses and consumers make smarter financial decisions and gain more control over their data through safe and secure APIs. It's played a key role in developing open banking solutions like Experian Boost and Quicken Loan's Rocket Mortgage.

Where will open banking go next?

Open banking may have found its initial footing in the UK with the passing of the PSD2 regulation, but it has tailwinds to accelerate quickly worldwide, particularly as card-not-present transactions are accelerating.

“Sixty percent of revenue in the UK is tied to card-not-present transactions," Corrigan said. "Open banking provides an alternative and potentially more seamless card-not-present experience than anything available today."

He predicts that Asia-Pacific will be the next region to adopt open banking. The reasons: consumers' willingness to share data, a high digital adoption rate, and a culture of digital innovation. North America is also beginning to see more open banking platforms, including Plaid, which is both an AISP and a PISP.

“As soon as global customers trust open banking, it's going to take off," Corrigan said. "Its potential is huge to help consumers receive the help, guidance, and support they need to manage all aspects of their finances."

With all of its advantages, it's no wonder that open banking is accelerating in the UK and across the world. Contact us to learn about our latest open banking integrations.