Open banking is a reform which requires banks to allow their customers to share their transaction data with third parties through application programming interfaces (APIs). Last year, the EU passed the PSD2 regulation obligating banks to comply with the open banking reform. Other countries, such as the UK and Australia, are already involved in advanced preparations for open banking.
Open banking, which is currently in its initial stages, has the ability to shake things up considerably for consumers and banks. What can each of these sectors expect, and how will all this impact on payments?
Impact on consumers
Open banking consolidates transaction data, providing an overview of all of a customer’s cards, wallets and accounts. Customers will be able to utilize new products that will help optimize their use of financial products and learn about alternative service offerings from other providers. The open model opens the door for omnichannel payments, context-based payments, contactless payments and other new payment models, thereby streamlining and facilitating payment processes for buyers.
On the other hand, the sharing of personal data can be a deterrent for many private consumers. Due to the many stakeholders involved – from third-party providers and customers to banks and data providers – robust security measures must be enforced. The GDPR and PSD2 regulations dictate the use of encryption, tokenization and continuous authentication to ensure data protection.
Impacts on banks
Banks have acted according to certain norms and standards for hundreds of years. While banks accumulate considerable data, they have traditionally made little use of it for the customer’s benefit. For example, if the customer had an overdraft, the bank was likely to offer a loan from which it would profit greatly. Open banking provides customers with a clear view of their finances, enabling them to transfer funds from other accounts or take a more affordable loan from a trustworthy third-party provider. Banks will need to step up and deal with this type of competition.
Traditional banks will have to face considerable competition from fintech companies offering new services and products. In China, we can see how AliPay and WeChat eliminated the need for banks by offering a full suite of payment options directly through their platforms. Rather than fighting the inevitable, banks would be wise to invest their efforts in developing new products based on AI, predictive analysis and other technological innovations, even in partnership with fintech startups.
Impacts on payments
The payment ecosystem stands to benefit from the open API based system. Software or other internet-connected devices can evolve into payment applications. The software or systems can take the form of chat forums, e-commerce websites, or chat apps websites, and can connect with APIs in order to perform transactions. This means that consumers will no longer need to login to banks. Even more significant is the fact that the payment process will become more context-based and will occur smoothly behind the scenes.
Open APIs also offer unprecedented opportunities for payment companies and reduced time to market. New fintech enterprises will be able to compete with veteran companies, which is an impetus for better and less costly services.
The customer-centric trend
Open banking is the result of the customer-centric trend which has heavily impacted on business, finance, retail and e-commerce. Today’s customers are technologically savvy and fully aware of their rights. They demand better service, enhanced data security and increased transparency. The global economic ecosystem has no choice but to evolve rapidly in order to meet these expectations in full.