Why next-generation payments are the key to taking open banking to the next level
Both consumers and merchants have proved they’re eager for change in financial services, but what we’ve seen since PSD2 is just the beginning. We look beyond the opening up of APIs to see what sort of next-generation payments will satisfy demand as innovation in open banking gains pace.
Open Banking has had some time to transition from concept to tangible products and services that consumers want to use. In Europe, it got a kick start with the implementation of the Payment Services Directive II (PSD2) in 2018. Now, the theory goes, if we’re happy to give permission for our data to be shared, we can benefit from a raft of new services that make our lives easier. And this opportunity has opened the door to third-party financial services providers that are ready to innovate. All they need to do is connect into banks’ APIs to tap into a wealth of data – account, transaction, product data and more – and use this to help create personalised services that cater specifically to customers’ requirements.
One of the many services open banking has enabled is instant bank transfers; the ability to make payments seamlessly from one bank account to another. No cards. No complex transaction process involving multiple parties and long clearance cycles. The attraction and benefits of real-time transactions mean that they’re growing in popularity across Europe as well as globally. In a recent study, 89% of respondents agreed that e-commerce would continue to grow, and the industry would need to make significant investment in online payment solutions. Furthermore, 97% expected a shift towards more real-time payments as a result. The forecast data backs this up, with the global real-time payments market size expected to expand at a compound annual growth rate of 33% between 2021 and 2028.
Driven by demand: the benefits of instant payments
The reason adoption is likely to grow so rapidly is the number of benefits instant bank transfers deliver. Convenience, choice, empowerment and a seamless experience for consumers – especially for mCommerce, where new Strong Consumer Authentication (SCA) multi-factor authentication requirements have made the card payment process less than ideal. And for merchants, the ability to lower transaction costs compared to card payments, get access to funds faster through speedier settlement times, and drive greater customer engagement and sales.
Both parties benefit from better protection against fraud. There are fewer steps, for a start. Think of the debit or credit card transaction process, which involves numerous parties in between the customer and the merchant – the issuing and acquiring banks, payments processors, card network providers. This not only affects the overall speed and cost of a transaction, but it also means fewer points at which fraud can occur.
Going up a gear
But despite the demand and the obvious advantages, what we’ve seen of Open Banking so far has fallen short of financial services revolution. The traditional structures and siloes are opening up, this much is true. Open banking providers can now facilitate connectivity to multiple banks’ APIs, enabling innovation and competition. But how many genuine payments capabilities have we seen as a result? And how many inroads have been made to bridge the gaps and bring about more fluid exchanges of data and services across different regions and countries?
Most initiatives have been focused on connectivity within single markets – countries rather than regions, and nowhere near globally. For merchants this isn’t progress enough. As discussed in our previous article, bank-to-bank payments must work across borders to create a global marketplace that boosts business. Payments solutions need to bridge those boundaries, so providers must look at extending functionality beyond what’s possible today.
It’s a two-way street
The focus on instant payments up to now has largely been on one-way transactions from consumer to merchant. However, we need to look at the merchant-to-consumer flow too. In the case of refunds, for instance, or consumer–merchant relationships where two-way transactions are common place. To streamline the transfer of funds in this direction will hold additional benefit to the consumer and make a real impact on both customer loyalty and merchants’ revenue-generation potential.
Another area of innovation is automatic transfers. The Open Banking Implementation Entity (OBIE) added Variable Recurring Payments (VRP) functionality in the update of its standard at the end of 2020. This will enable Payment Initiation Service Providers (PISPs) to initiate recurring payments – meaning customers won’t have to authenticate transfers on an individual basis. Once more, potential to add value to the experience of both parties in the transaction process. Faster, more secure, more flexible, more cost-effective, more convenient.
Aggregate to innovate
While there’s been significant activity in the name of Open Banking over the last two to three years, payment capabilities are still an area of great untapped potential. Other services that open-banking-enabled payments solutions can offer over and above API aggregators include reconciliation and fund aggregation. If merchants don’t need to open bank accounts in each market they service in order for the payments to be local and instant, their opportunity to access a global customer base opens right up. So getting to true payments transformation means exploring new ways to aggregate and reconcile. And bringing increased speed and simplicity to the existing complex, lengthy processes that are especially problematic when it comes to trade across borders.