Open banking is shaking up the financial industry and is poised to revolutionize the way banks share data with each other as well as with third-party app developers, FinTechs and payment providers. Open banking — a system in which banks allow third parties to freely access their data to develop new apps and services and provide bank customers with greater transparency — is accomplished with APIs that allow third parties to interface with bank systems and access data with minimal friction.
There are a multitude of benefits that open banking brings to B2B payments. Payments 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 Corporate accounting software can use open banking to automatically access bank information rather than rely on outdated and insecure practices like screen scraping.
“Initially, people were thinking about open banking with a focus on benefits for retail only,” Stefano Vaccino, CEO of open banking FinTech Yapily, said in a recent interview with PYMNTS. “People were not believing in open banking so much as a big evolution. When they started thinking about the small business and corporate space, I think they saw much bigger opportunities.”
The following Deep Dive explores open banking initiatives around the world, how APIs can harness open banking to facilitate B2B payments and how APIs can reduce the prevalence of outdated and insecure data-sharing methods.
Open Banking Initiatives Around The World
Both the U.K. and the EU have similar legislation mandating open banking for their respective regions’ financial industries. The EU’s PSD2, which went into full effect in September 2019, mandates that the region’s FIs share customer data with third-party providers to enable the development of better financial services for bank customers. The U.K.’s Open Banking Implementation Entity has a similar directive, but goes a step further by implementing a rule set regarding API security, messaging and dispute management processing in hopes of making every API in the country meet the same standards.
The U.S. lags behind both of these regions, as no government authority is mandating open banking or API use at all, let alone a set standard for them. Banks in the U.S. are still embracing open banking, with a 2018 report finding that 77 percent of FIs intended to invest in open banking initiatives by 2019. Businesses are also largely receptive of open banking, with one survey finding that 77 percent of small to mid-sized businesses (SMBs) — as well as large corporations — are already using platforms that harness open banking principles to gather data. More than two-thirds of businesses are ready to directly partner with banks to develop open banking platforms.
Benefits Of Open Banking For B2B Payments
Open banking’s data sharing benefits are a natural fit for B2B payments. Vaccino noted that 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. Open banking also allows developers to aggregate bank account data into a single accounting portal, enabling automated reconciliation of the entire data set rather than doing it piecemeal.
Issuing invoices and processing B2B payments can be simplified through open banking. APIs enable accounting platforms to accelerate payments by issuing invoices with integrated payment instructions and acceptance capabilities, saving payers from having to figure out their own means of conducting transactions. B2B payments can also have their processing fees reduced to nearly zero with APIs that integrate payment data to minimize card processing fees.
B2B payments are made more secure with APIs, as they can eliminate outdated and risky practices like screen scraping — a process in which payments processors require users to enter their bank account data directly into third-party apps. The legacy process increases the likelihood of data being exposed in a breach because the details are available in two places instead of only at the bank. APIs allow these payments processors to directly access customers’ bank accounts without needing the information.
Only 45 percent of companies report being completely satisfied with their firms’ payments and banking capabilities. Open banking is poised to dramatically improve that number as it continues to gain usage and provide a faster, smoother and less expensive B2B payments experience for corporations the world over.