Open Banking is an emerging technology in the financial industry landscape and has become a global phenomenon. The adoption of APIs has transformed the way banks share data with third parties to enhance the customer experience.

What is it?

It is a system in which banks open up their APIs and allow third parties to access their customer data to develop new apps and services. In simple words, it offers API-based connectivity to allow greater sharing of data. This fosters competition among financial service providers and unlocks innovation to better serve the end customers.

But what are APIs, if you are not yet familiar with them?

API is a software intermediary that enables apps to interact with each other. It acts like a messenger that pulls information from one place and feeds it to another. It allows a company to access information or software capabilities from another source, saving time and money for its customers.

By now you have a basic understanding of how this works. Now let’s look at its evolution and adoption across the globe.

The Global Adoption and Regulation of Open Banking

Open Banking Regulations

Open banking is expanding worldwide thanks to advancing API technologies and increasing networking between banks and fintechs. However, the adoption levels vary by country following their regulatory requirements and market forces. As per the Open Banking Report 2019, by Paypers, the countries worldwide have been distributed under five categories. This is based on the spread of Open APIs, regulatory requirements, and industry initiatives.

Adoption of digital banking

                                                                                                                      Created by Fujn; Source: Open Banking Report 2019, Paypers

Europe Leading in Open Banking

Europe is certainly a trailblazer, with the UK and Nordics leading in this ecosystem. In Europe, there is a clear regulatory framework — the PSD2 mandate. This mandate requires banks to provide customer bank account access to third-party providers (TPPs). PSD2 marked the beginning of open banking. It offers a new business model that not only delivers an effective integration but more innovative solutions to end-users.

The UK, on the other hand, has built an advanced digital ecosystem that puts it ahead. In 2016, the UK Competition and Markets Authority (CMA), formed The Open Banking Implementation Entity (OBIE). According to OBIE, around 300 companies have joined the OB ecosystem. Moreover, nearly 4 million consumers and businesses already use open banking-enabled products to manage their finances.

Why is the US Lagging?

In the US, the state-based legal and financial system makes it really tough to make any legislation regarding an open banking system. Consequently, the adoption in the US is lagging compared to other developed nations. Nevertheless, financial incumbents have started looking for integration capabilities and deploying new products as banking-as-a-service (BAAS). There are varying levels of openness. Notably, the three leading payment providers in the US, — FIS, Fiserv, and JHA, have API gateways, with varying degrees of openness.

Based on a new report, “Open Banking: revolution or evolution?” by EIU, banks worldwide are approaching open banking differently, with a mix of regulation and market-driven strategies.

In a recent executive order by President Joe Biden, to promote the competition in the American Economy, it appears that the administration is encouraging the Consumer Financial Protection Bureau (CFPB), an independent agency, to move quickly on the adoption of open banking. The order states to consider commencing or continuing a rule made under section 1033 of the Dodd-Frank Act, to facilitate the portability of consumer financial transaction data. While the US has so far witnessed an open banking model to develop in a free-market environment, the implementation of section 1033 will provide certainty in the form of a regulatory framework.

Who Will Benefit from OB?

This model not only serves the interest of end consumers, but also has the capability to render benefits to several stakeholders like banks, fintech, and SMEs.

  1. Data transparency, portability, and analysis can provide consumers with state-of-the-art banking and investment products. The customers can have the choice to select from multiple service providers available. There will be an ease of payments as well as ease of remittance and currency exchange.
  2. Fintechs might have an excellent opportunity to meet the consumers’ requirements with new and improved services in all domains such as personal finance, credit access, etc.
  3. Banks can avail collaborative advantage with Fintechs to offer holistic services to customers. This might deliver strong revenue growth and better customer loyalty for banks.
  4. Lastly, SMEs can be the biggest beneficiaries. Slow and lagging payments have always been an issue for SMEs and this worsened during the pandemic. Open banking may help them secure financing and address payment issues more efficiently.

Can it  Speed Up B2B Payments?

It is estimated that US B2B payment volume totals $25 trillion per year. Yet, the payment industry faces substantial complications and delays due to incompatible systems. The adoption of open banking can help solve this problem through API connectivity between banks and developers, thus leading to faster payment processing. APIs provide data integration and aggregation benefits. This helps in an automatic reconciliation of the complete data set rather than taking a fragmented approach. Consequently, it can help banks gain greater insight into customers’ requirements and address their needs.

As stated by Stefano Vaccino, CEO of Yapily, “the financial platforms, including those that process B2B payments, can harness open banking to accelerate data collection and analytics, potentially even collecting necessary data in real-time, rather than periodically, as many of these services currently allow.”

Benefits for B2B Payments

This new model can provide the benefit of issuing invoices and settling payments in a cost effective and time efficient manner. This will be done with integrated payment instructions and acceptance capabilities. Moreover, it eliminates the need for the traditional practice of screen scraping. It is a system where payments processors require users to enter their bank account data directly into third-party apps. APIs offer the capability to directly access customers’ bank accounts, thus making B2B payments much safer and more secure.

“There is a multitude of benefits that open banking brings to B2B payments. Payment providers can automatically access payment data to seamlessly transfer funds between banks without building custom software for each bank with which they connect. Corporate accounting software can use open banking to automatically access bank information rather than rely on outdated and insecure practices like screen scraping,” according to The B2B API Tracker®, PYMNTS.

What Makes Banks Unwilling to Adopt it?

While Open Banking has the capability to offer myriad advantages in the B2B payment space, traditional banks are reluctant to adopt this model. Needless to say, the complexity and costs involved in integrating APIs with the legacy systems of core banking platforms act as a major hurdle. Moreover, there has been a lack of a mutual agreement between banks and third-party payments processors, in terms of prioritizing data security and customer privacy.

The Growth in Global Open Banking Market

Open Banking Market value

According to a report by Allied Market Research, the global Open Banking market generated $7.29 billion in 2018, and is expected to grow at a CAGR of 24.4% to reach $43.15 billion by 2026. In 2018, the banking and capital markets segment generated more than 50% of the revenue, which will continue to be a leading contributor during 2019–2026. However, the payments segment is projected to witness the largest CAGR of 27.3%. While the challenges might continue to persist in the short to medium term along with the absence of clear regulatory authority and legislation in the US, the Open banking market is bound to grow in the B2B payment space.

Authored by Ekta Bhatia

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