Open Banking is poised to drive innovation
Open Banking is changing the way we bank in the UK and the rest of the world. With Open Banking, consumers can enable third-party providers to use the financial data held by their bank to develop new products and services that improve their daily lives.
In the UK, the number of Open Banking users increased from in 2021. The technology has already taken off in countries such as South Korea, which has over 20 million users, and it is set to penetrate the US market in the coming years.
The way we think of banks and our expectations of them are constantly evolving. And Open Banking is the next frontier for financial services.
The proliferation of Request to Pay
One of the most exciting applications of Open Banking is Request to Pay (RtP), which allows users to proactively request payments from other bank accounts. Although customers can already make real-time payments between accounts using mobile banking, RtP is revolutionising invoicing and regular payments - something particularly useful for merchants and self-employed business owners.
Debtors receive a notification with the amount due, granting them greater visibility over what they owe, while payees can track the status of all bills and invoices on a single device, providing them with a simple and efficient way to reconcile accounts.
Open Banking users can also make more accurate financial forecasts and reduce billing costs thanks to electronic invoicing. For business users, the removal of legacy and manual processes means that they can operate more efficiently, reducing the time wasted chasing overdue invoices, as Open Banking enables a 360-degree view of payments on a single platform.
The end of BACS payments
Open baking technology is also primed to replace BACS payments. BACS is currently the most widely used bank-to-bank payment method, accounting for around via direct debit transactions. One of the more popular uses of BACS is for payroll transactions.
But, Open Banking offers a simpler, more effective payment option for payroll providers. In short, it allows employers (or payroll providers) to make payments directly to employee’s bank accounts rather than submit complex batch files via a bank for BACS processing.
Moreover, Open Banking will improve real-time payments, challenging traditional card schemes to enable instant transactions between retailers and consumers. This is particularly relevant for e-commerce where retailers are constantly looking for ways to reduce cost and transaction friction.
Savings for merchants
Over the last few years, Open Banking has grown rapidly. Accelerating its adoption among merchants, are the cost savings for businesses. Open Banking eliminates the risk of cash mishandling. And the lower transaction costs from online purchases, make Open Banking attractive to merchants and easily accepted by customers.
The pandemic has seen more of us go online for retail purchases than ever before. In fact, made online purchases last year. So as more customers shop online, we will see more retailers gravitate towards Open Banking technology due to its cost-saving benefits. There are still issues to address such as chargebacks and purchase protection, however, the prize for the retailers is significant, so expect these issues to be actively addressed.
Although the speed at which Open Banking has been adopted in the UK is impressive, markets such as the US still have a way to go. A key factor that has helped popularise Open Banking on this side of the pond has been the passing of data legislation that has encouraged its adoption
Regions such as Europe, the UK, and Australia have all drafted or implemented regulations to nurture Open Banking innovation. For example, PSD2 legislation in Europe, enforcing data and privacy standards for APIs, and Australia’s Consumer Data Right Act have both supported Open Banking innovation, while reassuring customers that their money, and data, is safe.
Although the US is currently lagging behind, the next few years is likely to see Open Banking start to permeate the North American market, especially following the success experienced in other parts of the world.
The future of banking
Businesses and consumers want easy-to-use payment solutions that save time, reduce costs, and are convenient. So the way we understand banking will continue to change.
Fintechs and solution providers are leading this innovation within the payments industry. In just a few short years, we have gone from in-branch banking to mobile, and now Open Banking. It’s an exciting time for the financial services industry as we're able to deliver groundbreaking products that significantly improve the banking experience for consumers and merchants alike.
With these solutions, of course, comes greater demand and expectation from the market. Thanks to Open Banking, the UK has the payments infrastructure to support this innovation now, and in the future.
This article was contributed by Mike Peplow, CEO, Paynetics UK
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.