When it comes to making purchases online, today’s consumers have access to a plethora of payment options that can vary across the globe. However, one method that is seeing an increase in demand globally is open banking. It has revolutionized the banking payments system by meeting consumer demand for better, faster and more personalized customer experiences.
History of open banking
Open banking initiatives started in the 1980s but didn’t gain popularity until around 2007 when the European Union created the Payment Service Directive (PSD) to regulate payment services and providers. Its purpose was to lower entry barriers for financial technology and enhance consumer protection and rights. It provided the legal foundation for SEPA (Single Euro Payments Area).
In September 2019, open banking was further regulated by the European Commission with the second Payment Services Directive (PSD2). The technical regulatory standards on strong customer authentication and third-party access entered into force, enabling customers to give service providers access to their accounts to make payments on their behalf. Since PSD2, banks are required to allow service providers to initiate payments via strong customer authentication.
Why open banking payment is better for businesses and their customers
Open banking is the most customer-centric payment solution for many reasons. Firstly, it’s simple; payments are transferred immediately once strong customer authentication is given, without the need to type card details. It takes only a few clicks to confirm the payment with a password, face ID, or fingerprint.
Open banking has taken the user experience to the next level. Making payments has become easier with user-friendly interfaces, instant payment confirmation, and faster withdrawals and refunds. Companies benefit from immediate cash flow and increased conversion rates.
Making online banking payments via strong customer authentication is safer than using credit card details as it eliminates the possibility of fraudsters stealing the card information.
Transaction costs are much lower than credit card payments since there are no intermediaries charging commissions. It also reduces the number of declined payments that can occur from typing incorrect card information. This decreases the number of customer support cases and operational costs.
Open banking has increased the competition and quality of financial services with more transparent, secure, faster, low-cost, and convenient solutions. Within the next couple of years, open banking might even surpass credit and debit cards as the customers’ favourite choice of online payments.