Other parts of this series:
The wave of change that began five years ago is now irresistible
Since the adoption of PSD2 by the European Parliament in 2015, there’s been growing momentum behind Open Banking. This is set to reach new levels in 2020, as Open Banking catalyzes innovation and efficiency across the world of payments. That makes it one of the most important trends in the industry right now.
Open Banking regulations require banks to open up their systems and data to third-party providers. This is causing banks to reinvent their payments business models and build ecosystems of services.
One interesting example of the innovation spurred by Open Banking is HSBC’s Connect Money application, which allows customers to see all their accounts within a single application—even if those accounts are spread across different banks.
Connect Money demonstrates one of the most interesting aspects of Open Banking. Many Open Banking products and services are subject to “network effects”—they become more valuable as more banks participate. If Connect Money allowed customers to track only HSBC accounts, it might have been somewhat useful. The fact that the app connects across many banks is what makes it powerful.
This aspect of Open Banking can also make it easier for new entrants to grow and gain purchase in the market, since more access to data means more opportunities to create value for customers.
Other Open Banking initiatives are built around using innovative ideas to extract more value from non-banking data. Commerzbank, for instance, has used Open Banking to tap into Internet-of-Things data to adjust loan repayments for capital equipment based on usage.
Elsewhere in the payments arena, Open Banking is beneficial to small and medium-size enterprises (SMEs). This is because it enables account aggregation, better financial management, easier credit checking of customers and the integration of lending and accounting applications. Thanks to Open Banking, SMEs are able to receive and make payments using different platforms with better visibility and speed.
Santander UK has teamed up with fintech Kabbage to deliver SME loans with these benefits. Such partnerships are paving the way for a new generation of fast and innovative SME lending tools and platforms.
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But perhaps the most important payments-related feature of Open Banking, for businesses of all sizes, is how authentication is handled. Open Banking payments are authenticated directly between consumers and their banks. This means the chargebacks that merchants must pay because of fraud or rejected payments simply disappear. This offers substantial savings for all merchants. Payments powered by Open Banking also offer real-time credit transfers, guaranteeing the payment and enabling merchants to ship the product immediately.
Open Banking also supports the rapid adoption of cloud-based processing services, which are a powerful option for decentralizing processing and inspiring payments innovation.
The benefits of cloud-based processing include:
- Lower costs
- Better compliance maintenance
- Improved enterprise agility
- The ability to flex volumes quickly
The recent partnership between IATA and Deutsche Bank is an example of the potential here. The new payment option, called IATA Pay, gives customers a wider choice of payments methods when purchasing airline tickets. Initiatives like this one provide incentive for investment by airlines and airports in infrastructures such as cloud and “common use” systems.
Finally, Open Banking is providing consumers with the ability to manage their finances in an open manner and move their data with complete transparency. Connect Money, mentioned above, is an example here. So are overlay services built on open APIs. The most common overlay services that are being worked on today include Request to Pay and P2P payments services. We can expect to see many more in the coming years.
Come back for the next post in this series, which will look at the continuing adoption of real-time payments.
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