Taking local bank transfers global
Different approaches to banking connectivity around the world mean we’re still way off achieving global instant bank transfers. What will get us there? Creating frameworks that transcend geographic boundaries, agreeing on standardised APIs, and building partnerships between banks and payments companies at local levels.
Open Banking. The promise of better consumer experiences, greater opportunities for businesses, and a banking sector open to competition and fit for the changing dynamics of the modern world. In 2018, we saw the European Union’s Payment Services Directive II (PSD2) come into effect. Arguably one of the most significant steps taken to ignite innovation in financial services by making it possible for payments providers and third parties to connect directly into banks’ APIs. Since then, we’ve witnessed financial products and services enabled by open banking rise in popularity. From tailored money management solutions to new consumer-to-business payment options such as instant bank transfers.
Beyond Europe there is no legal framework in place to support Open Banking. But that doesn’t mean financial services and fintechs aren’t building their own networks via different means. The benefits of open banking for consumers – increased control, tailored services, faster transactions, and a more streamlined experience, to name just a few – are such that the desire to adopt is strong worldwide. Businesses also have good reason to be embracing open banking-style networks, especially when it comes to instant payments. Offering this option to customers as an alternative to card and other methods of payment gives consumers greater choice, lowers transaction costs for merchants, boosts engagement, and increases sales conversions.
No unified approach
But, while instant bank transfers are increasingly popular as a payment method across the globe, an international instant bank transfer network is yet to be established. And underlying this disconnect are big differences in approach. We’ve seen open banking initiated in Europe thanks to regulation in the form of PSD2. However, the same isn’t true everywhere. In other regions, market demand rather than regulation has been pushing open banking forward.
Take Latin America. While there’s no regulation mandating banks to offer APIs to registered third parties, forward-thinking payments companies have sought to bring open banking functionalities to market in other ways. They’ve forged relationships with individual banks and set up a system whereby they can access their APIs for a fee. This is in contrast to the situation in Europe where regulation means that banks have to give registered third parties such as Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs) free access to their APIs.
In the US too there’s no formal regulation around open banking. While there’s movement towards standardisation in the form of the Central Bank’s FedNow real-time payments network, due to launch in 2023, banks currently provide APIs to third parties through their developer portals to address the demand from merchants and consumers for instant payments methods.
In India, the Unified Payments Interface (UPI) has been hugely successful. Developed by the National Payments Corporation of India (NPCI), the real-time payments system that allows peer-to-peer and peer-to-merchant transactions has 100 million active users and facilitates billions of transactions a month.
Taking real-time transfers global
So with different regional approaches, how do we create a truly international instant banking network? Currently, instant bank transfers are siloed by region. So you can’t pay a merchant based in Europe from South America using an instant bank transfer payment method. The main sticking point is the lack of a single, agreed API standard – not just globally, but across Europe as well.
To get closer to real-time online transactions, we need to build an interconnected network of regional instant bank transfer solutions that merchants can access via a single API. In this way, businesses will be able to reach a global customer base – billions of consumers – and give them the opportunity to pay via a secure, instant online payment method, wherever they are. Getting to this point, payments companies and banks need to connect on a local level. This will require more open frameworks that enable third parties in different regions to tap into banks’ APIs. But without this standard yet in place across Europe, where regulators are doing their bit to accelerate open banking, it’s clear that the challenge of creating such a network on a worldwide scale is significant.
Standardisation and partnerships: the key to instant international initiation
Whether to satisfy merchant demands and customer expectations or being driven by region- or country-specific regulation, open banking – and instant payments specifically – are gaining traction across all markets.
Regions such as the US and Australia are looking to expand their individual frameworks for how third parties can access bank APIs to offer new direct bank transfer payment methods. But true progress towards building a real-time platform internationally relies on standardising APIs on a global level and building local partnerships that provide access to banks.
This will be the key to seamless integration of systems and interoperability between players: banks, payments providers, third parties working to common frameworks and a single API standard. Only then will we reach the true potential of a global marketplace underpinned by a boundary-free transaction experience.