How Open Banking Revolutionised Payments & More

Open
banking, a relatively new concept in finance, is rapidly gaining momentum.
Previously, traditional banks held an exclusive monopoly over customer data. In
Europe, this was ended in 2018 with the PSD2 regulation. It mandated banks to
share information with licensed third-party providers, strictly with customer
consent, of course. The data sharing happens via secure APIs, which act as a
bridge between different software.

Open banking payments increase in adoption

The
key benefit of open banking is its potential to improve online payment
processing for customers and merchants. Open banking enabled the new payment
method referred to at Noda as “pay-by-bank.” It’s an account-to-account
(A2A) transaction without the involvement of card networks. Customers are
redirected to their trusted bank’s interface and complete authorisation there.
Only licensed PISP providers like Noda can offer this service.

Pay-by-bank
is superior to traditional card payments in many ways. First, it offers a much
quicker and smoother user experience (UX). Customers don’t need to manually
enter their payment details, as they’re redirected to their bank’s app or
website, depending on the device they use. This results in frictionless
checkout and less cart abandonment.

Secondly,
pay-by-bank payments are secure. Measures such as strong customer
authentication (SCA), which requires verification by multiple factors, are a
legal requirement. Plus, data sharing happens via regulated APIs rather than
screen scraping.

Customers
value convenience and safety, so this type of payment is becoming their
favourite. According to Open Banking UK, 9.7 million payments were made
in June 2023, a surge of 88% from 2022. There were further 10.8 million
payments in August. Over 11% of British consumers are active users of open
banking, and 17% of small businesses also adopt this innovative tool.

And
this trend is likely to accelerate. Statista forecasts A2A payments to grow by 14% annually
between 2023 and 2027. Currently classified as an alternative payment method,
this will place pay-by-bank into the mainstream. Meanwhile, Juniper Research predicts open banking
transactions to reach $330bn in value by 2027. That’s from $57bn in 2023, a
total of 479% market growth.

Innovative potential of open banking data products

Yet
payments are just the tip of the iceberg of open banking potential. There is a
whole other field related to open banking data. In PSD2, third-party providers
can also obtain an AISP license, which allows them to gather customer data from
different sources and put it into a single interface. Think of budgeting apps
that allow users to connect different bank accounts.

For
businesses, this offers numerous opportunities and data products. For example,
at Noda, we offer Know Your Whales (KYW), which is
an analytics tool that provides customer insights. Merchants can use KYW to
target clients of high lifetime value (LTV), improve client engagement, build
re-marketing campaigns and develop personalised products.

Open
banking tools can also be used for onboarding and compliance processes such as
Know Your Clients (KYC). They enable instant data retrieval for client
verification. At Noda, for example, we offer Pay & Go, which allows
businesses to onboard their clients with non-ID upload and liveness detection.
The solution covers onboarding, verification and the first deposit.

Open
banking tools offer value in lending, too, allowing companies to quickly verify
income, wealth and affordability. Lenders can minimise human error and avoid
piles of physical documents, as the data is digitalised and gathered in one
place.

Plus,
this is beneficial for better financial inclusion. The use of near real-time
financial data means that lenders take into account wider criteria than in
traditional eligibility assessments. This means more people can get approved,
potentially even those without a credit history.

Future of open banking

In
future, open finance is a possibility. It’s the next step from open banking
towards wider data transparency. In open finance, more financial institutions
openly share information, including asset managers, investment funds, pensions,
insurers, mortgage providers, and more. In fact, open finance is already a reality in Brazil. The country
finalised implementation in 2023.

In
the immediate future, open banking adoption will depend on regulation. PSD3, an
update from the groundbreaking European regulation, will be finalised in 2024.
It promises more standardised APIs and better security features. Meanwhile, in the US, the CFPB proposed a new regulation
that will promote open banking. As open banking moves towards mainstream
acceptance, its potential promises better payments, data products and greater
financial inclusivity.

This article was written by FL Contributors at www.forexlive.com.