The United States has been slow to fully embrace the open-banking philosophy, but there are signs the shift is accelerating. As more Americans link their banking, credit, and financial accounts, they expect customizable payments solutions, faster access to funds, and increased control of their financial wellbeing.
Globally, the open-banking market is expected to top $130 billion by 2028, fueled by consumer demand and technological capability. A report from Ripple, Trends in Regional Payments: Inside the Evolving Global Payments Landscape, examines how payments are changing worldwide and the trends driving North American adoption.
Benefits to Open Banking
Third-party companies are at the center of the open-banking model. Banks give approved third-party platforms access to their clients’ accounts, and the platforms can then perform payments and share financial data.
Though Americans have been reluctant to grant access to third-party platforms, the benefits outweigh the risks. Open banking gives businesses and consumers the ability to accept more revenue streams and grant access to more financial products. The model also increases the number of customer touchpoints, which creates the opportunity for personalization.
In many cases, third-party providers can also process transaction data faster. Increased transparency into creditworthiness should make credit scores more accurate, aiding lenders and consumers.
Imminent in North America
Europe has spearheaded the open-banking movement. In the UK, account-to-account (A2A) payments increased by 280% year over year in 2023. But the United States is trending upward, with 71% of consumers indicating they prefer to make purchases and pay bills from their bank account.
Open-banking solutions gained ground in North America in 2023, exemplified by the partnership between Coinbase and a Canadian A2A infrastructure provider designed to offer alternatives to the traditional banking experience.
The open-banking model keeps banks and fintechs competitive and drives margins down. In turn, that will push traditional banking institutions that dominate the U.S. market to look for alternative ways to boost revenue and cut costs. Open-banking innovations, especially distributed ledger technology, can solve those issues.
Though Americans’ hesitation to adopt open banking has centered on security concerns, third-party platforms are innovating to keep payments safe. Data from the Financial Data Exchange (FDX), a nonprofit organization driving U.S. open-banking adoption, indicated that in 2023 more than 30 million Americans converted from credential-based account access, using IDs and passwords, to tokenized API access.
The FDX believes open banking is imminent in North America because of consumer preferences but also because of a more established regulatory framework. Still, more consumer education is needed. Visa recently reported that 87% of Americans have linked their bank accounts to third-party companies, but only 34% are aware of how the process works.
The Arrival of FedNow
Instant payment rails should also serve to drive the open-banking movement. FedNow, the instant payments service launched by the United States Federal Reserve, gives U.S financial institutions of all sizes the ability to deliver fast, customizable payments services.
Launched in mid-2023, the rail should bolster the awareness and adoption of open banking. That growth should become exponential as more financial institutions understand the service’s benefits.
Accessibility is chief among the advantages. FedNow is available to small businesses, large corporations, and individuals. Real-time rails will make U.S. businesses more competitive because they can operate with the same speed and precision as their global competitors. FedNow also improves the efficiency of payments and settlements.
Because customer expectations will likely increase after they use the service, FedNow should push financial institutions to innovate. Financial flexibility for businesses and consumers will expand as more avenues for revenue are available.
On the downside, financial institutions are likely to feel more pressure to increase spending on tech stacks to meet the demands of solutions like FedNow.
The Universal Language
Because of the complexity involved with connecting global open-banking systems, there must be a universal language that can translate messaging between financial institutions. ISO 20022 is the messaging standard that allows companies to securely share financial information worldwide. It’s an essential tool to support payments modernization and plays a crucial role in facilitating instant payments.
The standard should reduce transaction errors, even in cross-border payments, while making transactions faster and safer. ISO 20022 provides an established, robust common language between businesses and banks that puts a halt to end-of-day batch file payments processing and fully integrates with real-time payments.
ISO 20022 also delivers better analytics, improving financial institutions’ decision-making. Operational efficiencies should improve as companies are able to exchange enhanced remittance information. The standard should also eliminate the need for manual processing, reducing inaccuracies.
The ISO 20022 messaging standard is the foundation for FedNow, but it also offers the payments service the capability to evolve as the payments landscape changes.
What’s In Store for Stablecoins
Stablecoins are digital currencies tied to the value of a fiat currency, such as the U.S. dollar. These types of digital assets allow for direct transactions between customers and merchants, thus reducing transaction fees.
The currency is also cryptographically secure, meaning it is fully predictable and unbiased. Users can settle transactions in near real time without double payments or other settlement issues. Established on distributed ledger technology, stablecoins can serve as a bridge from the traditional Web2 financial model to the innovative Web3 economy.
PayPal made a substantial move into the stablecoin market in 2023, launching its dollar-based stablecoin, PayPal USD (PYUSD), which can be redeemed on a one-for-one basis with U.S. dollars. The new stablecoin makes for speedy and accurate payments, but it also has intriguing applications as a cross-border payment option. The emergence of PYUSD is a milestone that further legitimizes alternative payments and boosts the profile of digital currency.
While there are still regulatory hurdles in store for stablecoins, the backing of fintechs, banks, and governments is speeding the adoption. In the United States, there has been bipartisan support for the Clarity of Payments Stablecoin Act. The legislation is designed to accelerate stablecoin adoption and foster innovation.