The ripple effects of open banking—worldwide

Friday, February 24, 2023 5 minute read
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5 minute read

Editor's note: This story was updated on February 24, 2023, from its original publish date of May 13, 2022.

Open banking is quickly gathering steam worldwide, and the impacts will be felt by an increasingly large percentage of businesses over the next few years. But what exactly is open banking, and what does it mean for your business and customers?

What is open banking?

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

Before open banking, if a business wanted to accept payments directly from a customer's bank, both of the banks involved had to participate in a third-party network. But with open banking, 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. South Korea saw over 20 million people use the technology in 2021. In the US, the president signed an executive order signaling its commitment to open banking, and the Government of Canada is currently considering the best way to enable its safe introduction of open banking. Meanwhile, a number of other countries are working quickly to determine what open banking will look like in their own markets.

Open banking service providers: AISPs and PISPs

The Payment Services Directive (PSD2), passed by the EU in 2018, created new categories for open banking service providers and set new rules for how they can access banking accounts and financial data with users' consent.

Under PSD2, open banking service providers fall into at least one of two categories—Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs):

  1. AISPs retrieve account data from financial institutions via APIs. Experian Boost, for example, is an AISP. Their app provides users with ways to build their credit scores, track their loans, dispute late credit card payments, or view their accounts—all through a single user interface.
  2. PISPs use APIs to transfer 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 via open banking services. Many taxpayers received their refunds in record time, and HMRC reduced costs and streamlined its payment process.
"Open banking initiations are faster, smoother and provide consumers with better financial management," said Nick Corrigan, president, Europe, at Global Payments.

Open banking offers big advantages to consumers

With open banking, consumers have more control over their finances than ever before. Gone are the days of managing finances via a single financial institution. But that's just the beginning. The technology offers plenty of other benefits:

  • Faster, simpler payments. Consumers can authorize payments with their existing online banking credentials, reducing friction. Payments are direct and instantaneous.
  • Savings on fees. Open banking can save consumers money on interest rates and account fees—a big incentive to adopt the technology.
  • Stronger security. Multi-factor authentication (MFA) and a face ID or fingerprint provide advanced account protection for consumers.
  • Potential to receive personalized products. Businesses now have visibility into their customer's buying habits and spending. This perspective will allow them to offer tailored products to customers and provide simpler and faster acceptance. For example, a company may use open banking to provide ways for its customers to manage their spending, apply for a new line of credit or select payment terms like buy now, pay later.

Big potential for businesses

Open banking offers many benefits to businesses small and large, including:

  • Lower costs. Businesses save money on interchange fees from credit cards, and network fees from third-party bank transfers.
  • Faster funding. Unlike credit card processing, which can take up to three business days, open banking enables near-instant settlement.
  • Personalized customer experiences. Businesses can draw from financial data insights to tailor customer experiences, offering a personal touch and more opportunities for engagement.
  • Lower risk of fraud. Biometrics and MFA help reduce the risk of fraud. A Microsoft study shows that MFA alone blocks 99.9% of cyberattacks.

New opportunities for issuers

Beyond benefits for customers and businesses, 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.

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

Looking to the future

Open banking promises to accelerate quickly worldwide, particularly as card-not-present transactions increase. “Sixty percent of revenue in the UK is tied to card-not-present transactions," Corrigan says. "Open banking provides an alternative and potentially more seamless card-not-present experience than anything available today."

Where will we see mass adoption of open banking? Corrigan predicts that Asia-Pacific will be the next big frontier, thanks to 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."

The takeaway? Businesses should prepare for the changes—and big benefits—that open banking promises. It starts with a conversation with your payments partner, and we're here to help. Contact us to learn about our latest open banking integrations, or visit our 2023 Commerce and Payment Trends Report to learn more about how open banking is accelerating trends in emerging technology.

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