By Tony Azzara
Increasing open banking activity, catalyzed in part by requirements of Europe’s PSD2 regulatory initiative, has emerged as a key strategy for many institutions – which means open banking services will soon be widely available for small and mid-sized businesses (SMBs), according to Ovum and other reports.
Ovum’s research further noted:
Besides the Ovum report, the relationship between open banking and real-time payments was also highlighted at the annual conference of the Association of Corporate Treasurers (ACT) in July 2018. There, Lloyd Banks’ API and open banking commercialization specialist Yogesh Sholapurkar explained that the key opportunity that open banking APIs offer to businesses comes from their ability to be instantaneous. Said Sholapurkar, “Open-banking APIs represent a move towards real time business.” He illustrated the point using a hypothetical example from a car dealership: “Traditionally, the interaction is between them and the finance company, with the transaction taking place the following day – so the customer can pay, but can’t drive away. But with an API, they could transact instantaneously.”3
Examples from another summer 2018 report demonstrate that open banking APIs are in use globally, and in emerging as well as developed markets. Start-ups and Mobile in Emerging Sectors: Insights from the GSMA System Accelerator, published by the GSM Association (GSMA) of mobile network operators, offers several examples of mobile money transfer apps that incorporate open banking APIs from various banks. One, in Myanmar, enables cashless payments between merchants and customers. Others enable bank-to-bank interaction and transactions between mobile operators and their customers.4
And BBVA, which operates a free online exchange of open banking APIs in the U.S., Mexico, and Spain, describes multiple open banking use cases. BBVA notes that through open banking APIS, SMBs can obtain detailed reports and analysis of financial data from their banks in real-time, making it easier for them to analyze their finances, request loans, etc. BBVA also offers an open banking example that could improve SMB cash flow. If a customer payment fails to arrive on time, that service “allows users to know at all times how much it would cost to request and pay for a loan for the outstanding amount while waiting to receive it.”5
Apparently key to the rise of open banking is real-time payments, sometimes called immediate or fast payments. Real-time payments appear to occur instantly but have behind-the-scenes clearing and settlement complexity. A prior article explains how real-time payments work and the U.S.’s plans for developing real-time international commercial B2B payments.
Meanwhile, according to the Ovum report, “the rollout of new real-time payment infrastructure in 2017, most notably in the U.S., Australia, and the SEPA zone, has driven a marked change in attitudes. Where it was once seen as a regulatory-mandated compliance project, it is becoming more widely viewed as the foundation of a wave of new customer-facing enhancements.” The report notes that:
According to the Ovum report, security and reducing the risk of financial crime are high on the open banking agenda across the industry as a whole in 2018. Ovum notes that security “is arguably the single biggest barrier to a more rapid pace of development” because “providing third-party access to customer data runs contrary to the historic bank operating model and, as any large financial institution will freely admit, losing customer data is a far bigger threat to their business than being slow to market with innovation.”7
Concern over security is highest among European banks, where – ironically, says Ovum – PSD2, which mandates open banking, has come into force at about the same time as Europe’s General Data Protection Regulation (GDPR), “which is some of the most stringent data protection legislation in the world.” In Europe, 58% of cite security as a key risk, up from 45% in 2017; meanwhile, in the Americas, security concerns over open banking APIs declined to 32% in 2018 from 40% in 2017. Globally, 43% of banks that are increasing investment in their payment systems cited security as a top-three driver of this growth, with 21% listing it as the top priority.8
Open banking appears to be growing faster than originally expected in most regions of the world, promising innovative new customer services that embed payment transactions into customer experiences. Open banking’s growth is being driven, at least in part, by the simultaneous emergence of real-time payment systems. Security concerns still remain, however, as open banking APIs enable access to customer data by third parties.
Tony Azzara is a business technology writer and researcher based in Queens, NY, whose work focuses primarily on financial services technology.
1. 2018 Ovum Global Payment Insight Survey: Retail Banks, Ovum; https://www.aciworldwide.com/-/media/files/collateral/trends/2018-global-payments-insight-retail-banking.pdf
3. “Open Banking Will Present a Host of Benefits To Corporate Treasurers. Matt Packer Listens in on a Discussion Between Finance Experts to Find Out How,” The Treasurer; https://www.treasurers.org/thetreasurer/why-open-banking-will-be-better-for-corporate-treasurers
4. Start-ups and Mobile in Emerging Markets: Insights from the GSMA Ecosystem Accelerator, GSM Association; https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2018/08/Start-ups-and-Mobile-in-Emerging-Markets-Issue-3.pdf
5. “The best examples and opportunities created through open banking,” BBVA API Market; https://bbvaopen4u.com/en/actualidad/best-examples-and-opportunities-created-through-open-banking
6. 2018 Ovum Global Payment Insight Survey: Retail Banks, Ovum; https://www.aciworldwide.com/-/media/files/collateral/trends/2018-global-payments-insight-retail-banking.pdf