By Eline Blomme, Head of Product Management Digital Commerce at Worldline
Almost four years since the introduction of the EU’s Second Payment Services Directive (PSD2), this article examines Open Banking’s progress, at what is an exciting time for digital payments amidst great economic change.
Open Banking is a result of a series of reforms around financial information and payments designed to make banking more competitive and create a new and innovate wave of services. To achieve this, new industry standards such as PSD2 have been put in place to help consumers share their data with the new services in a secure way. The aim is to provide third-party providers with access to their consumers’ personal, banking and financial data through the use of Application Programming Interfaces (APIs) – information which, until now, has been restricted solely to banks.
As we find ourselves in a world of recovery, resilience and renaissance, this banking and finance revolution spans regulation, technology, and the very form in which banking is consumed. Just as the Italian Renaissance emerged from the darkness of the Bubonic Plague, a new and exciting global era for the industry is underway. And the opportunity to transform this critical industry, one that shapes the economy, is now part of the main agenda for many countries across the globe.
The global pandemic has helped to further emphasise the many benefits of digital payments, including just how easy they are to adopt, as we look to the future providing users with new and efficient capabilities. But Open Banking isn’t just about new capabilities. Improving existing services and processes, lowering costs, and delivering enhanced experiences are equally important in order to drive growth and see return on investment.
Until now, outdated banking technologies have inhibited digital progress with the maintenance of legacy systems often accounting for a vast portion of a bank’s IT budget. Meanwhile, much research to date has suggested that many bankers feel their core processes are not built to adapt quickly to change.
And while much headway has been made in the industry, in terms of the implementation of new platforms and technologies, there are still challenges when it comes to the widespread application of Open Banking. For example, data is most securely shared in open finance applications via APIs that pass data using encrypted tokens – but we are yet to find solutions to the vulnerabilities that hackers present as part of this process.
Despite the few challenges it presents, the benefits of Open Banking are many and include:
- Allowing customers to pay instantly – Open Banking provides online businesses access to Instant Payments infrastructure, meaning that funds can be immediately remitted to an account from the payee.
- Eliminating chargebacks – Chargeback fraud, often called ‘friendly fraud’ is a major source of lost revenue and lost goodwill to online retailers. PSD2 does not support chargebacks, allowing for a much fairer and more efficient dispute resolution service.
- Building customer loyalty – All businesses can create a branded payment solution, integrating ideas such as loyalty schemes or delayed payments. Businesses in turn can analyse banking data to target more relevant offers and discounts based on consumer data.
- Integrating customer data at the checkout – E-commerce companies can embed bank account information into online store checkouts, displaying the shopper’s account balance and transaction history, maintaining engagement visits for longer periods.
Fundamentally, Open Banking is only just at the point of inception. Future applications could include AI-enabled ‘predictive banking’ that anticipates customer demand ahead of time, and intelligent personalised Direct Debits that consider the customer’s behaviours. There is huge potential for this technology and a clear case for it being of public interest. Regulation such as PSD2 helps to create a single payment market, allowing for greater levels of innovation and the cross-pollination of ideas. At the centre of this is the issue of banks opening their APIs to other companies, mainly ‘Third Party Payment Services Providers’ (TPPs).
Open Banking is a new frontier for the industry, empowering consumers to equip TPPs with their financial data with a view to developing new products and services that ultimately improve daily life. In the end, businesses and consumers are looking for simple payment solutions that save on time and costs whilst increasing efficiencies – all checkpoints which Open Banking seeks to address. Leading the charge in this revolution are the industry’s FinTechs and solution providers who have helped to shift the world away from in-branch banking, towards mobile, and now to Open Banking in just a few short years.
Now is truly an exciting time for the banking, finance and payments industries as we have a prime opportunity to provide pioneering products and services that will significantly transform the banking experience forever.