Future of Open Banking Payments

Open banking, required by the PSD2 regulation in the EU, mandated traditional banks to share customer data with fintech companies that have approval. This ends the monopoly banks had on data. The process is strictly regulated and can only happen with explicit consent from the customer.

Open banking employs APIs for software to communicate, allowing banks to share information securely. This approach has sparked financial innovation, enhancing products and fuelling account-to-account (A2A) open banking payments.

Instant Transactions

Payment delays have always troubled customers, potentially leading to missed payments or extra charges. Open banking offers a solution with an API-based method, enabling banks and service providers to directly transfer funds between accounts, known as “pay-by-bank.” This method speeds up transactions, avoiding traditional delays.

In e-commerce transactions, customers can approve payments directly through their bank using Account-to-Account (A2A) payments. This process eliminates the need to enter payment details manually, as open banking interfaces guide users between their banking app and the e-commerce site smoothly. This improves the user experience and ensures merchants get funds faster.

Enhanced Security and Fraud Prevention

With the increase in digital payments, the emphasis on security and fraud prevention grows. Open banking payments incorporate strong security measures like strong customer authentication (SCA) and encryption, which is a legal requirement in European PSD2 regulation. Open banking payments would often involve real-time transaction monitoring (depending on the provider, of course) which helps detect fraud early and minimises financial losses.

Cross-Border Payments

Cross-border payments face challenges like high costs and complexity. Open banking offers a solution by enabling direct, secure transfers between international financial institutions, potentially reducing fees and processing times. This could make international trade easier for both businesses and consumers.

Artificial Intelligence and Machine Learning

Artificial intelligence (AI) and machine learning (ML) technologies are playing a crucial role in the evolution of open banking payments. Use cases are diverse, from personalised product recommendations and dynamic pricing models to sophisticated fraud detection algorithms. As these technologies evolve, they will undoubtedly unlock new opportunities and drive further innovation.

Regulatory Evolution 

The successful implementation and growth of open banking payments depend on a supportive regulatory framework. For example, open banking adoption in Europe was largely driven by PSD2. Ongoing collaboration between regulators, financial institutions, and TPPs is essential to navigate the complexities of the global financial landscape and protect the interests of consumers.

Benefits of Open Banking Payments

• Security: Merchants avoid handling sensitive customer data thanks to direct bank authentication, reducing fraud concerns.
• Speed: Open banking payments are processed instantly in the UK and EU, improving merchants’ cash flow.
• Cost Efficiency: A2A payments often have lower fees than traditional methods, allowing savings to be redirected.
• Higher Conversions: Simplified payment authorisation boosts revenue by eliminating the need for manual detail entry.

Future of Open Banking Payments

The use of open banking payments in e-commerce is rapidly growing and is predicted to increase further. By 2026, A2A payments are expected to account for 10% of all e-commerce transactions, making them the fourth most popular payment method worldwide, following digital wallets, credit cards, and debit cards.

Europe currently leads in adopting A2A payments, as noted by Statista in March 2023. However, this trend is expected to expand globally. McKinsey forecasts that by 2026, A2A payments could facilitate about $200 billion in consumer-to-business transactions in North America alone, with potential growth in other payment types as well.

The next stage of open banking is open finance, which extends data sharing to a wider range of financial sectors. These include investments, insurance, pensions, mortgages, and lending. Open finance hasn’t been widely adopted worldwide yet, but Brazil is leading the way. The country started its final phase of open finance implementation in March 2022.