B2B Payments

Open Banking Plans For A Big Year — Even Where Regulators Aren’t Forcing It

Open Banking regulations aren’t yet in effect in Europe via upcoming PSD2 rules, but already, banks there are getting a head-start on implementation. Financial institutions (FIs) in the U.S. and Canada, meanwhile, are following suit, opening up data to third-party FinTechs — after a bit of convincing.

While the EU’s PSD2 and the U.K.’s Open Banking regulations are certainly major motivations for banks to open up their data, U.S. banks’ agreement to do the same suggests there’s more to gain than regulatory compliance.

“The initial reaction [to data sharing] was a negative, knee-jerk reaction that, ‘This is our proprietary data that we collected, and now we’re being asked to share it — that’s a negative for us,’” explained Izabella Gabowicz, COO of expense management company Sensibill. “Initially, it was seen as a bad thing. But what’s happening is they’re starting to come around.”

Gabowicz spoke with PYMNTS in October, a few days after the company announced its partnership with the Royal Bank of Scotland to integrate its services for the FI’s small business (SMB) customers. They’re one in a long list of FinTechs striking such partnerships with traditional banks that rely on data sharing.

Ferhan Patel, co-founder and chief product officer at Payment Rails — another company that uses APIs to facilitate business payment — recently told PYMNTS that this trend of banks opening up their data to third parties will “absolutely” continue into the new year.

“2018 is going to be a game changer in Europe with the implementation of PSD2,” Patel said. “Open banking allows innovative third parties to build financial services on top of banks’ existing infrastructure and offer a better user experience and access to more information.”

But regulation is only one part of the push for banks to open up.

“Banks can either continue status quo or realize there is a shift in demand from consumers that will be fulfilled through FinTechs or various other third parties,” added Patel.

In a separate interview, Marten Nelson, co-founder and VP of Marketing at Token Inc., an open banking platform provider, echoed that pressure from banks’ customers is a key force driving open banking.

“Consumers are putting pressure on banks to provide banking services with a more customer-centric approach,” Nelson told PYMNTS. “Pressure will also continue to come from the tech giants. Already, Facebook and Amazon have made plays in the financial services space.”

Nelson cited research from Bain & Co., which found that 60 percent of consumers in the U.S. said they would try a financial service from a tech company they already use.

“The clock is ticking, and banks know it,” said Nelson. “To keep up with these bigger and more agile firms, banks will need to move to a marketplace business model if they want to provide the value-added services that consumers demand within a timeframe that their customers will accept.”

Payment Rails’ Patel also highlighted the pressure FIs face.

“Banks are best-positioned to drive API adoption, having all the infrastructure and existing security in place,” the executive said. “However, if banks don’t react quick enough, other players will be sure to eat their lunch.”

It’s not just about meeting customer demand though. Nelson noted that collaboration with third parties will lead to new revenue streams for institutions too.

Open banking initiatives, of course, have broad implications across consumer, small business and enterprise banking — and across use cases from cross-border payments to financial planning.

For B2B payments in particular, Nelson said there will be a few implications of data sharing.

“First, open banking will reduce the cost of transactions, as middlemen are cut out,” he said. “Second, the use of APIs within open banking will also lead to greater flexibility for businesses, as new payments applications and services become available.”

PSD2 and Open Banking regulations in the EU and U.K. are fast approaching, both with deadlines in the first quarter of 2018. Roadblocks to implementation and compliance have already emerged.

One, noted Nelson, is a lack of understanding and awareness of the regulations among banking customers, including small businesses. According to Chris Gorst, Open Up Challenge prize lead at Nesta, while banks are in “implementation mode,” SMBs aren’t really sure what’s ahead.

“There is a lack of awareness as to what open banking means — what it is, what kinds of things it might make possible,” he said in an interview with PYMNTS in November. “A big concern for any FinTech is how you reach SMBs. There are a lot of them, and they’re very diverse. A challenge for them right now is awareness among SMBs, and I think there should be more of an effort by the authorities to raise public awareness about the benefits open banking can bring.”

Another major snag: confusion and other struggles among banks to comply with the new rules. Deutsche Bank recently published a report highlighting some of the confusion around PSD2 implementation, while separate reports in The Telegraph noted that several major banks in the U.K. have been granted more time from the Competition and Markets Authority after revealing they would miss a key deadline.

“Although many banks have taken the first steps toward open banking, as outlined in PSD2, most have only gone as far as they need to in order to comply with the legislation,” said Nelson, “ignoring opportunities to improve their services and gain first-mover status.”

But the sentiment from FinTechs, banks and other industry incumbents is clear: Open banking is coming, and it’s permeating markets even where regulators are taking a lighter touch to the subject.

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