The Global Rise of Open Banking and Fast Payments are Reinforcing Each Other

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.

Open Banking APIs May Become A Competitive Differentiator

Ovum’s research further noted:

• 87% of all banks report having a clear strategy for developing open banking APIs, or application programming interfaces, up from 59% in 2017. Developers use these APIs to create innovative new services that can access an institution’s open banking services on customers’ behalf.
• Perhaps more telling is that 79% of banks in Europe say they plan to actively encourage developers to use their APIs, instead of viewing open banking APIs only as a regulatory compliance issue.
• It became clear in the past year that open banking would be a major future competitive differentiator for banks, particularly as competition with financial technology (fintech) companies increases.
• Competition between banks and fintechs will accelerate the pace at which innovative new open banking services emerge for businesses large and small.²

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

The Rising Role of Real-Time Payments

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:

• “[Banks’] emphasis on immediate payments has doubled within a year, from 31% in 2017, demonstrating the pace at which real-time payments is driving change in the industry.”
• 85% of all banks expect real-time payments to drive revenue growth, up from 53% last year.
• 86% of banks are now either experiencing or expecting to see improvements in customer service from real-time payments, up from 61% in 2017.
• 88% of banks are delivering enhanced retail customer propositions (or plan to) on top of real-time payments, up from 56% in 2017.⁶

Security Concerns Drive Investments

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