One of the latest trends to hit the money transfer industry in the UK and Europe is Open Banking. Based on the use of Application Programming Interface (API) technology – and initiated by PSD2 in 2016, the Open Banking movement allows banks to make their customers’ financial data shareable and enables third parties to access real-time financial information.

As a trend considered by many to be revolutionary in the money transfer industry, it’s important to analyse the advantages of account-to-account payments; the opportunities Open Banking can hold for banks, third parties and consumers; and finally, the challenges facing the use of Open Banking technology.

Fundamentals of Open Banking

Put simply, Open Banking is a framework that allows institutions to share financial data safely and securely with consumers and third-parties. Using APIs, licensed third-parties can gather financial information, integrate this data or even push payments directly from customers’ bank accounts to third party systems including mobile apps and online portals  

Account Information Service Providers (AISPs) can fetch read-only financial data which allows them to compile customers’ financial information, make recommendations, provide intuitive services and more. In comparison, Payment Initiation Service Providers (PISPs) can make direct bank transfers – or ‘Account to Account’ (A2A) payments – from bank accounts.

Key features

With recent surveys suggesting that over 86% of financial institutions are aiming to use open APIs to enable Open Banking in the near future [1], it’s no surprise that Open Banking offers a range of benefits to third-parties and consumers alike. For example, A2A payments have notable improvements to UX, including the removal of conversion barriers; these improvements result in a more efficient transaction journey, allowing consumers to make payments through their own banking app without the need for inputting card data.

Direct payments initiated by PISPs also have a higher transaction acceptance rate (95% in comparison to up to 14% failure rate for card transactions [2].

However, aside from these beneficial features, a key advantage of Open Banking for all involved is the reduced fees in comparison to card payments. A2A payments don’t involve transaction fees or operational costs, saving users up to 80% on fees in comparison to card payments [3].

Another benefit offered by Open Banking that seemed to excel in its rollout is that of security. With a significant increase in card fraud as a result of the rise in digital payments and remittances in recent years, the need for a more secure transaction experience was overdue. With Open Banking, this risk appears to have been reduced, with PSD2 and the UK’s Payment Services Regulations (PSRs) keeping Open Banking services in check.

Finally, similar to what we’ve seen with the rise of technology instruments such as E-wallets and Super Apps, Open Banking and Open-Source technology facilitate a wide range of new opportunities across not only the payments industry, but other verticals too. The collaboration between established banks, Fintech companies, third parties and software providers (such as RemitONE) encourages the integration of services to create new and improved propositions [4].

With new open-source technology and fintech enablers like RemitONE, consumers can have more control over their apps, and offer more services to their customers. Making use of RemitONE’s established Open Banking partners also allows Fintech start-ups, money transfer operators (MTOs) and banks to utilise new technologies and offer their customers a safer and better experience.  

Considerations

Open Banking has certainly gained traction over recent years and the benefits seem to be providing innovative solutions for common issues in the payments and remittance industries. However, as with all developments, it’s important to analyse the challenges presented by the introduction of new technology for both the clients and consumers. For example, the main challenge facing Open Banking is security, particularly as A2A payments are more often being utilised by smaller Fintech companies [5].

Final Reflections

It’s clear to see that Open Banking plays host to a range of key benefits for banks, third parties and consumers alike in all industries. It can offer lower fees and enhanced user experience, paving the way for collaboration between traditional and modern players in the payments and remittance industries.

However, the challenge of implementing new technology continues to be a essential part of the digital revolution. In the coming years, it will undoubtably be of interest to see how the Open Banking framework, PSD2 and Open-Source technology will continue to evolve, and where it will take the Payments industry.

References

[1] https://www.finextra.com/blogposting/20777/four-ways-open-banking-can-benefit-financial-institutions

[2] https://recurly.com/blog/benchmarking-minimizing-credit-card-transaction-decline-rates/

[3] https://truelayer.com/openbanking/open-banking-payments-vs-other-payment-methods/

[4] https://www.openbanking.org.uk/wp-content/uploads/Open-Banking-A-Consumer-Perspective.pdf

[5] https://www.comparethecloud.net/articles/opportunities-challenges-open-banking/

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