Collaboration Is the Key to Open Banking Interoperability

Published : 2 months ago, on 11/07/2024

Alex Reddish, Managing Director of Tribe Payments, an API-first digital payments and infrastructure orchestrator, outlines how the true potential of Open Banking remains untapped.

Global Open Banking payments transaction values are expected to exceed $330 billion by 2027, up from $57 billion in 2023. But are they truly global? The simple truth is that the bulk of transactions are domestic and not international. To make global Open Banking a reality, the industry needs to overcome a huge obstacle in the way – interoperability.

The promise of a global Open Banking ecosystem is exciting, dangling the potential of truly frictionless yet ultra-secure payments in front of us. The UK market is often held up as an Open Banking success story, with the number of active users reaching eight million at the end of 2023. But dig deeper and the UK numbers are just a drop in the ocean of overall payments – right now, only 10% of the UK population is using Open Banking. While a record 14.45 million UK Open Banking payments were made in January 2024, this pales into insignificance when compared with the tens of billions of card transactions processed by the major global card schemes.

Even though we live in a world where cross-border payments are eating a bigger share of the overall payments pie, making Open Banking work across borders is fraught with difficulties, because systems in different countries aren’t linking to each other. The vision of Open Banking – to increase competition amongst retail banks and strengthen consumer protection – will not be realised until data can flow effortlessly between different industries and indeed different countries.

There are a few notable exceptions. The Asia-Pacific region has seen significant innovations and developments in Open Banking, such as India with its groundbreaking Unified Payments Interface (UPI). While UPI’s success is in large part due to India’s 1.4 billion-strong population driving a critical mass of transactions, UPI’s interoperability with other Asia-Pacific payment systems including those of Singapore, Thailand and Malaysia is also a key element. During 2024, UPI has already linked up with Google Pay to enable international payments, and France’s Lyra to enable acceptance of UPI payments in France. UPI is now also facilitating cross-border QR code transactions between India and Nepal, allowing Indian travellers to make instant UPI payments across various businesses through UPI-enabled apps.

But elsewhere, the vision of interoperable Open Banking has yet to be fully realised. Other regions will need to develop common rules, standards and the technical building blocks to bring it to life.

Why interoperability plays a crucial role in Open Banking

A key component of Open Banking is the ability for authorised third parties to access account information and to initiate payments with customer consent. Banks can do this in two ways: through their existing customer interfaces or through dedicated APIs. But there are no standardised APIs – it’s been left to players themselves to develop their own interfaces. While there have been several regional standardisation efforts, APIs are still widely fragmented, making interoperability difficult to achieve.

Interoperability is vital in ensuring that the patchwork of systems run by different banks, fintechs and third-party players (TPPs) can all talk to each other, exchange data securely using a common standard, and allow customers to view all of their financial data easily, no matter who their bank or service provider is.

But interoperability won’t be achieved without standardisation, and right now, most Open Banking markets adhere to local standards. Singapore, whose regulator was the first in the region to set out a framework for Open Banking in 2016, has subsequently enjoyed high adoption of APIs, as have South Korea and Hong Kong which took similar approaches. Australia has taken a regulator-led approach with its Customer Data Right mandating financial institutions to adopt Open Banking. Cross-border data sharing involves many legal hurdles to jump, but the regional examples outlined above show that it can be done.

Achieving interoperability requires collective efforts

Interoperability challenges are not simple to overcome, but nor are they insurmountable. Some tough questions need to be asked. Who funds interoperability, or indeed the building of a new payments system altogether? Gaining consensus and budget is hard enough, but ensuring adherence to various technical and legal baselines will require Herculean efforts in markets where there is no central body to organise the workflows. No payments player would dare strike out on its own and commence work without an overarching regulatory framework to guide them. It could be argued that it will be difficult to ensure regional or global interoperability without regulatory intervention at a national level first. But as we have seen above, national market-led approaches have been effective too.

In Europe, with its long-established harmonised legal frameworks like PSD2, national bank and TPP licenses are recognised across member states. The Asia-Pacific region has adopted a mix of market-led and regulator-led approaches to ensure API standardisation and technical building blocks are in place to provide the conditions for Open Banking to take off.

Successful Open Banking implementations happen when financial institutions and third-party players collaborate under the auspices of regulatory input. To make this work on a global level, we need regulators in different countries to learn from each other, share best practices, and invite Open Banking entities and standards bodies like ISO to work together too.

Payments regulation is paving the way for interoperability – act now

In Europe, the payment industry is now gearing up for PSD3, the new Payment Service Regulations (PSR), FIDA, and other frameworks that will transform the way fintechs and financial services firms work with customer data on a pan-European level – and further level the playing field between banks and non-banks. Now is the time for industry players to reframe Open Banking from a compliance obligation to a market opportunity.

Under PSR, Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs) will be allowed to build custom API interfaces that can connect directly to banks and other payment providers. On the face of it, this should improve uptake and adoption of Open Banking. But banks and payment entities will also have to disclose quarterly statistics on their API performance and availability. This API ‘league table’ could spur faster user adoption, by galvanising better API build quality to interface with banks, and direct businesses towards the better-performing providers.

PSD3 flexes more muscles than its predecessor PSD2 and is wider in scope, considering new challenges in fraud, digital payment transformation, access to payment systems, and baselines for Open Banking. But while PSD2 made Open Banking a reality, with bank APIs enabling customers to consent to their data being shared with third parties, the proposed PSD3 text states there will be no charging for the use of Open Banking interfaces, and there will be no mandating of standard APIs, meaning potentially thousands of PISP/AISP APIs operating differently. In this respect, the shortcomings of individual APIs and no clear consensus on commercial pricing could act as a drag on adoption and slow down the journey to interoperability between Europe and the rest of the world.

FIDA proposes to give financial information service providers (FISPs) the right to access real-time customer data arising from nearly all financial services data, including current and savings account, credit cards, mortgages, loans, and pension accounts. It means that lenders and credit providers for example can draw upon more and better-quality data to make more informed lending decisions. To give you a snapshot of what that could look like, according to Experian data from 2022, over five million so-called ‘credit invisible’ people in the UK were excluded from the best credit rates and deals due to insufficient data about their financial track records. FIDA could potentially pave the way for millions of ‘thin credit file’ but otherwise creditworthy people to access more services based on real-time data, and not the static historical data typical of traditional credit scoring models.

By leveraging real-time transaction data from a wider range of consumer account products, fintechs and banks can improve data-driven decision-making, reduce risk exposure, lower default and delinquency rates, and benefit from reduced credit losses. Instead of relying on fragmented snapshots of customers’ financial circumstances, real-time Open Banking and Open Finance data gives lenders a full high-definition picture of individual’s financial circumstances. The result? More hyper-personalised products and services that deepen customer engagement, deepen loyalty, and capture more market share.

Banks, fintechs and third-party players need to move now and ensure their technology platforms and processes can adapt to these regulatory changes before they come into effect over 2025/26. Investing in anti-fraud measures, risk monitoring, and a tech platform that can bend and flex in response to changing regulations will offer numerous opportunities for innovation, collaboration, and help to pave the way for a truly global Open Banking ecosystem.