Open banking is nothing if not a lot of moving parts and complications. But could merchant incentives help fuel this ongoing effort at digital payments innovation?
That was one of the questions raised in a new PYMNTS interview with Ireti Samuel-Ogbu, Citigroup’s head of payments and receivables for Europe, Middle East and Africa. In a discussion with Karen Webster, Samuel-Ogbu talked about the role of API aggregation and how incentives can help to ignite open banking, one of the main efforts now taking place in the world of payments and commerce.
The discussion took place as more attention shifts to open banking. A Sept. 2019 deadline looms for financial institutions across Europe to comply with PSD2 and U.K. Open Banking regulations and enable trusted third parties to access a customer’s data based on the account holder’s consent — a key step toward more digital payments innovation.
“Some banks see this as a threat to how they do business,” Samuel-Ogbu said, describing one of the challenges that face these ongoing efforts in open banking. This means the focus as been more on compliance with PDS2 rather than commercialization. The U.K. has been instrumental through the Competition and Markets authority (CMA) in creating an enabling environment through setting a common standard for nine retail banks.
But as she told it, the right approach is to keep eyes on the prize — with customer consent at the heart of open banking, it’s incumbent on banks and third party providers to create compelling services on open banking rails that are attractive to customers. In Citi’s case, one such example is friction-free payment offerings that reflect the evolving demands of both individual consumers and corporate banking clients. Among those demands — and a focus of open banking efforts — are quick payments taking place directly from consumer banking accounts for a variety of use cases, including eCommerce sales, citizen payments to government entities, and more.
Take those bank account payments as one solid example of where incentives — even relatively small ones — could work to promote open banking. Instant collections from bank accounts via open banking rails provides a significantly lower cost alternative to cards for eCommerce merchants, as an example, and hence merchants can use incentive options at their disposal as one way to promote user adoption.
The challenge as it now stands, however, is that the user experience for payments via open banking is not yet as seamless as the card payment experiences that many consumers are generally used to in high card penetration markets like the U.K. With open banking, some banks employ a redirect to a user’s online banking website for strong customer authentication; however, increasingly banks will look to adopt better authentication options such as mobile bank app-based authentication, which is increasingly biometric-based, as an example.
Additionally, consumers are generally used to using cards for online purchases, and are heavily incentivized for doing so — airline reward miles, for instance, or the insurance cardholders often get from using that payment method. But were merchants to offer proper incentives for using a bank transfer payment method, this could help spark more mainstream use under open banking, Samuel-Ogbu said. Airlines, for example, have various low or no-cost incentive options such as air miles, priority boarding, etc. And using this payment method could help save merchants money, given the high cost of card payments. “You need incentives to swallow up the slightly clunky user experience,” she said.
No matter the offering, clunky user experiences cannot stay clunky forever — not if consumers and corporate clients are expected to sign on to more open banking innovations. Scale requires seamlessness when it comes to financial services and transactions, and seamlessness requires application programming interface (API) standardization and aggregation, Samuel-Ogbu said.
Fragmented API standardization plagues the open banking world — and that can serve to slow down the buy-in to open banking on the part of traditional financial institutions and other organizations. As Samuel-Ogbu told it during the PYMNTS interview, “there are multiple competing standards in Europe alone: U.K. Open Banking standards, STET in France, Berlin Group standard.”
Fixing that — moving toward better standardization — builds confidence in open banking and helps to spark partnerships and innovation. “Then adoption is a lot faster,” she said. With some 4,000 banks in Europe, bilateral API connections based on relatively loose standards “make it really hard for all banks to be connected,” she said. “It becomes very challenging. ”
The API ideal — the goal of standardization — is what she called “looking for an aggregation point” that will in turn promote more innovation in payments and eCommerce, and which can help financial institutions “build new solutions” under the open banking effort. That provides an open bank opportunity for traditional financial institutions, she told Webster. That’s because with all the existing API standards now floating around, “it’s very difficult for a FinTech to be an aggregation point, unless you start getting a convergence of standards” and make it easier for those companies that want to do open banking to actually do it.
API standards can facilitate partnerships and innovation efforts beyond the regulatory scope of Open Banking. One example is a collaboration between SWIFT, Banks, FinTechs and merchants (which Citi is championing) to develop a ‘Pay Later’ API standard with global applicability for banks to provide financing direct into digital platforms via API. As Samuel-Ogbu told Webster, “one inhibition” to open banking on the part of traditional financial institutions is that they will lose out “on the typical solutions they provide clients, such as cards, and lending.” But offering standard, trusted APIs can help “mitigate” that worry, she said — in part by banks investing in the API economy and being able to deliver financial services — such as lending and others — in real-time into digital platforms via APIs.
So what will the open banking future bring, especially after that Sept. 14 deadline?
As Samuel-Ogbu sees it, financial institutions likely will “connect with one or two or three aggregators, and then connect to all their clients in Europe.” She pointed out, “what open banking is providing is a choice,” and that choice will come from all those API-enabled connections, and perhaps even well-placed merchant incentives.
After all, as she said, what is open banking but “choice, ubiquity and consumer experience?”