One trend that’s making a big impact on the payments industry is open banking. Though many payments professionals know that open baking isn’t a new concept, there is still a large majority of society that isn’t aware of what open banking is. According to a recent study by Which UK, 92 percent of the United Kingdom doesn’t fully understand the concept of open banking and how the recent PSD2 regulations are going to impact the payments industry.
This lack of awareness isn’t just a problem in the UK, it’s a common problem worldwide. As open banking regulations spread internationally, it’s imperative that the entire payments ecosystem understands how they will be influenced.
The open banking revolution
Traditionally, banks provide end-to-end services across the banking and payments value chain, but with the implementation of Open Banking Standards everything is about to change. Banks are no longer a part of one big club that consumers are required to do all of their banking with. These new standards require banks to share customers’ data with third party providers, changing the entire payments landscape.
Currently, when consumers have two different accounts, they only have the ability to track one account at one time and transfer money in a traditional manner, for example, this is known as an Interac® e-Transfer in Canada. With open APIs, consumers will now have the ability to access multiple accounts through a singular service, making it simpler for them to manage and track their finances. Along with changing how users can access their accounts, open banking will change the way customers are making everyday payments. Today, the payments process is slow and expensive, requiring a lot of manual intervention, but as third-party providers gain more access to their accounts, the process will radically change. Through open APIs, customers will have the ability to pay directly from their accounts, creating a quicker and cheaper payment process for all parties.
All of these changes that open banking brings within the industry have the potential to upend the way we bank and disrupt the payments sector. By enabling digital-only banks, the management of money will automatically be through intelligent software, which offers even more opportunity for customers and third-party providers, requiring banks to adapt in order to be remain relevant. Open banking will have a wider impact than just payments. Asset custody and lending will also be affected.
The future of traditional banking
It’s important for banks to know that even though open banking brings a lot of change within the industry, it won’t disrupt their business because they play such an imperative role within the ecosystem. Banks are a part of the massive global infrastructure that moves money and communicates with consumers on a personal level, and even through open banking regulations, that won’t change.
In order for open banking regulations to be truly successful, banks must rethink how they are positioned within the market. The banks that don’t adapt to these new changes and become an equal partner within this new market run the risk of losing market share. In order to be successful banks must use open APIs to generate new customer insight to improve their customers experience.
This new transition into open banking isn’t about taking business away from the banks, it’s about creating and distributing a wide variety of financial and non-financial products and services that strengthen their relationships with customers. It’s the traditional banks that accept this new payments landscape and create opportunities with third-party providers that will be successful.
A new competitive market
Banking has been around since the 1800’s so it’s no surprise that these institutions host outdated technology, and historically have been quite risk averse. So any upgrades are most likely to be for the purpose of maintaining their ledgers (blockchain) and authentication (Secure Key), not necessarily for faster payments or other technology trends.
For decades the payments industry has been slow to implement new technology, but the trend of open banking demonstrates the opposite. By eliminating much of the outdated processes and giving the entire payments ecosystem access to consumer data, fintech companies now have the ability to thrive. These new regulations create a level of competition the industry has never seen before.
Opening an industry can result in growth across the board. The telecom industry and VoIP is a prime example. VoIP works by translating voice signals into internet protocol (IP) data packets, which are then exchanged between callers via the internet. This concept has done much to upend traditional telecom providers, but and was expected to grow at a compounded annual growth rate of around 28 percent between 2016 and 2020. With more telecom companies offering VoIP as part of their packages, the innovation has lead to growth for all parts of the industry.
With open banking, fintech companies will have the ability to build their own applications using customer data to create platforms that engage consumers. Where fintech companies have an advantage over traditional banks is that they are able to target one specific banking service within the payments infrastructure. For traditional banks this can be intimidating because they may think that this means fintech providers are going to take away their business, but it’s actually the complete opposite.
For example, companies like PayPayl, Prosper, LendingTree, Stripe and more have started owning the customer relationship for specific use-cases that used to be offered exclusively by banks. These fintech companies are taking the industry by storm, and many fintech companies today want to partner with banks to help customers manage their data. Even though some banks may consider many fintech companies a threat, it’s the fintech companies and the traditional banks that see each other as partners that will thrive within this new market. By creating partnerships, banks are able to bring fintech’s agile process and their technological experience, while fintech companies are able to utilize banks’ knowledge of regulation, creating a partnership that’s focused on the customer’s relationship.
The focus on the financial user experience
The open banking revolution is exciting because it’s all about the payments industry accepting digital transformation in order to enhance the customer’s experience. Through this evolution, a lot is going to change, from a competitive landscape to banks creating a new business structure. It is within this time of much needed change that we will see the companies and banks that develop partnerships succeed within the industry.
About the Author
As nanopay’s chief revenue officer, Nilesh Dusane is responsible for all customer-facing touchpoints and works closely with the sales and marketing teams to ensure alignment and growth. With 20 years of experience in the payments industry, Dusane has previously worked as the head of global sales at Ripple, where he was responsible for developing go-to market solutions that focused on the company’s ongoing relationships with banks. Dusane also served as VP of sales and product strategy at Fiserv. He is recognized by the Bankers Association for Finance and Trade (BAFT) as a future leader in transaction banking. Dusane holds a bachelor’s degree in computer engineering with specialization in advanced microprocessors from Mumbai University.