The differences in open banking — here and across the pond — stand in stark relief. In the U.K., it’s mandated. In the U.S., it is the free market that is determining open banking’s evolution.
In a PYMNTS TV episode on open banking, London-based TrueLayer Co-Founder and CEO Francesco Simoneschi and Wells Fargo Executive Vice President of Open Banking Imran Haider told Karen Webster that although the means of getting there may differ, the end result will be the same: improved customer experiences, additional revenues for banks that leverage their data and better conversion rates for merchants.
“We are in the early days for sure,” remarked Simoneschi, who added that “this is a land grab to a certain extent, but we are at the very beginning of a technology shift.”
There’s more work to be done, and that work differs by geography.
As Simoneschi said, a mature market would be defined as one that has been in place for a long time, marked by limited changes, and that’s not been the case at all — at least not yet — with open banking.
Europe has a way to go in terms of user experience, said the TrueLayer executive, and it is user experience that will determine whether or not open banking will be “prime-time,” widely used technology.
In short: The utility has been proven — and now the experience must improve.
Banks are still exploring how to bring consumers on board with open banking, said Simoneschi. For those financial institutions (FIs), “we are getting more and more into a territory of how open banking can be a revenue and engagement opportunity.”
Haider noted that the value in open banking, at least for the FIs, lies in meeting the customer where they are — whether that’s in mobile banking channels or in the app. Banks are discovering the value of application programming interfaces (APIs) and data flow on their own in the U.S. (rather than having open banking mandated to them), and they have sought to monetize that value.
Regardless of whether open banking is driven by government efforts or the pursuit of profit, a foundational concern lies with introducing new financial products and services to end customers.
Simoneschi pointed to new use cases tied to credit risk scoring and buy now, pay later (BNPL) options that connect consumers, merchants and FIs in an ever-tighter ecosystem.
“These are the use cases that the banks should be thinking about,” he said.
On the other side of the spectrum, there is increasing demand from the merchants. As Haider said, they’ve seen the value in using bank payments because of the value inherent in price, speed and security (in essence, improving their own user experience).
The Economics
As business models develop, enhancing merchant/consumer experience and the bank experience, the traditional economics underpinning those relationships might change, Simoneschi and Haider said. The time-tested model has been one where the “merchant pays” — interchange fees or other transaction costs — with money flowing into FIs’ coffers.
But technology is driving costs down, and competition among providers is ramping up. As Simoneschi told Webster, better pricing on transactions will drive fees down. Banks can pivot to new sources of top-line growth by monetizing access to data.
“Over time, there are going to be sets of premium features,” said Simoneschi.
For third parties that want to connect with customers’ bank accounts and get a wealth of data as the onboarding process commences, that will warrant a transaction fee that will be shared with the bank along the customer journey, not just at the moment of transaction.
The Evolution Of The Killer App — And Personalization
Open banking promises to be the age of the killer app — that continuum of services under one digital umbrella, with a single front door that generates both value and volume. Embedded payments are just part of the equation, and the key is personalization, Simoneschi and Haider agreed.
APIs enable that personalization, as they allow third-party providers to be part of the workflow between bank, merchant and end consumer.
The roads to personalization vary depending on where you look. In the U.S., intelligent bill payments, where real-time transactions to billers, done directly account-to-account (A2A), is an early use case enabled by open banking. Across the pond, said Simoneschi, consumer propositions have crystallized around wealth management, investing and cross-border remittances. All of those apps need to be connected with one’s main bank account to move money out and take in funds.
The positive ripple effect accrues to merchants in the form of higher conversion rates.
“It’s all about the user experience, once again,” said Simoneschi. “You’re paying with your phone and don’t have any data to input … the transaction is tied to a trusted entity, which is your bank.”
Merchants are also beginning to incentivize consumers through credits or discounts to use bank account payments as they see their conversion rates increase.
This is not to say that all of the enthusiasm and innovation tied to open banking will be focused on the consumer. In Europe, noted Haider, commercial payments — initiated by enterprises in B2B or B2C transactions — are likely to be low-hanging fruit, particularly as gig workers return to their tasks and economies reopen.
And in contrast to the U.S. — where real-time payments may be in corporates’ sights (particularly for disbursements) — in Europe, demand for APIs is still tied to easing the integration of ACH and batch payments.
The Fraud Factor
As with any sweeping digital initiative, where data flows are critical, open banking must weigh the negatives: fraud, chargebacks and disputes. Simoneschi noted that fraud is relatively rare in open banking, as each transaction goes through customer authentication and biometrics (and no card details are shared with merchants).
And in the case of chargebacks, he said, platforms are the conduits to guaranteeing which protections are in place when a payment goes wrong, or when what is ordered or paid for does not arrive.
In Europe, said Simoneschi, with the revised Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR), there are current regulations that clearly spell out which data points must be served up to a third party, and how that data must be collected, maintained and even disposed of.
Navigating those issues in the United States, said Haider, will involve similar parties and considerations. Consider the small business that is using accounting software that wants to bring in data through that software.
Using his own firm as an example, Haider said that Wells Fargo has developed a “control tower that lets the client firm log into Wells Fargo and select the accounts and elements within those accounts they want to see (customer permissions dictate what can be shared, and they also can revoke access).
Looking Ahead
As it stands now, Europe is a bit further ahead of the U.S. in open banking adoption, and the U.K. is home to some of the digital-only banks and firms such as Monzo, Revolut and others that have tapped into better data access and APIs in a bid to innovate and bring new products to market with speed.
Haider said that in the U.S., much of the tech complexity — representational state transfer (RESTful) APIs, integrations, etc. — have been tackled, but it’s important to educate corporate customers (who may not be tech firms) that connecting to platforms is easier than they might think.
Looking ahead within the next 12 months, projected Simoneschi, the vast majority of user experience and connectivity issues will have been addressed, and open banking initiatives will be focused on use cases.
“You will be surprised how many specific products, functionalities and solutions in the market will be exploding with certain functionalities of open banking to improve certain business, payment and onboarding processes,” he concluded.
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