The ultimate guide to Open Banking payments for PSPs

Open Banking is an industry term that’s often misunderstood. We explain more about what it is, where it came from and how it’s disrupting payments.

What is Open Banking?

Open Banking describes a way of securely sharing data held by banks, if customers consent to this. Some countries mandate a standardized format for this data-sharing.

Better bank payment is just one of the stand-out use cases of Open Banking. This connects customers to their bank accounts locally so they can pay sellers worldwide in seconds.

Open Banking payments are not only speedier, simpler and safer for consumers. They also help e-commerce merchants boost conversion, customer satisfaction and cost savings.

Where did Open Banking come from?

Open Banking was introduced in the EU and UK in January 2018, originally as a regulatory initiative to improve competition in banking and payments.

The revised payment services directive, or PSD2, regulates how Open Banking is implemented in the EU and EEA. However, the reach and scope of Open Banking is expanding.

Banks and authorities in Australia, Brazil, Canada, India, Hong Kong, Singapore, the US and more are actively exploring Open Banking opportunities.

Meanwhile the scope is growing to include financial data around savings, loans, pensions and insurance for more of an Open Finance proposition.

What problems does Open Banking solve for PSPs and their customers?

Open Banking tackles various intractable payment problems that PSPs and their customers face head on:

• Coverage – the reach of Open Banking is potentially anyone with a bank account. No subscriptions or additional on-boarding via intermediaries are needed.
• Cost – it’s cheaper than card payments with no ad valorem interchange fees, chargebacks PCI DSS costs.
• Adoption – the consistent, intuitive UX of Open Banking helps to boost adoption and success rates for bank transfers done better.
• Fragmentation – using existing infrastructure gives sellers access to thousands of banks and customer accounts through a single integration. And enables payers to make local bank payments to thousands of sellers worldwide.
• Security – it’s based on bank-grade security without cumbersome 3DS processes, or the exchange of sensitive card data, putting transactions in scope of PCI DSS.

How is Open Banking being used?

Open Banking is the technical rails on which providers run services, so there are countless possibilities for new products and solutions. Here are just three use cases:

Payments – making it possible for sellers to accept payment direct from customers’ local bank accounts quicker, easier and better than ever before.

Financial management – providing a more joined-up view of money, making it easier for consumers and businesses to manage their finances. And enabling providers to tailor products and services better.

Know your customer – helping providers know their customers better, which presents new opportunities around verifying accounts, identities and affordability. This improves access to service and capital as well as management of risk and more.

Why get involved in Open Banking now?

Several overlapping trends are driving the interest in and uptake of Open Banking. Payment volumes and values are growing as a result.

At the same time, your customers, whether they are large e-commerce retailers, iGaming operators or banks, want to hold on to their customers and own those relationships. They want to compete strongly in the digital remittance and pay-in/pay-out space.

Open Banking is embedded into the financial system. And transformation of cross-border payments has already started. It’s time to get on board and develop your own compelling propositions, tailored to particular use cases, customer segments and payment corridors.

Drivers of Open Banking

Bank account-funded payments have always been popular, especially in Europe. They’re what customers know and feel comfortable with. However, several overlapping trends are turbo-charging the interest and reach of Open Banking.

• Connected customers – today’s customers are increasingly connected via mobile, smart watches, speakers etc. They lead busy, on-the-go lives and expect speed, convenience, value and choice as the default. And are known to move to providers for a better solution or UX.
  With Open Banking payments, there’s no need to top up wallets or type in card details on the tiny keyboard of a mobile device. The UX is slicker and quicker than cards. It’s also easier than logging into online banking and manually go through the payment process step-by-step.
• Covid kick-start – the global pandemic changed how people bank, shop, meet, date, game and more. Friction-free, digital-first journeys are now must-haves.
  Open Banking plays to this by giving consumers a better way to make local bank payments to sellers globally. It gives sellers access to hundreds, if not thousands, of banks and customer accounts through a single integration.
• Rise in real-time – there were 64 live real-time payment schemes globally in 2022, accounting for nearly $525 billion in e-commerce transaction value. This is set to grow at a CAGR of 13% through 2026.
  Real-time payments will transform speed of payment for consumers. But also settlement and certainty of payment for sellers, with all the extra benefits around cashflow and working capital efficiencies.
• Payment as an operating system – every company will be a fintech company, according to venture firm Andreessen Horowitz. This means more opportunities to embed financial services and payment at the point of need. But also, more new entrants who don’t necessarily have a finance background.
  Opportunities as well as possible disintermediation threats for incumbents exist in the same future. Open Banking is a great alternative to cards and direct debits, especially for cross-border sales. And a great way to embed bank-funded financing in all types of use cases.

Take-up and reach of Open Banking

Against the backdrop of changing customer expectations, technology and regulation, it’s no surprise that Open Banking is growing in popularity, volumes and values.

Seven million consumers and small and medium businesses are actively using Open Banking-powered services in the UK as of January 2023.

The European market is set to be the largest for Open Banking, growing from 12.2 million users in 2020 to 63.8 million in 2024. Meanwhile worldwide users are forecast to reach 132.2 million in 2024, up from 24.7 million in 2020.

As to transaction values, Open Banking payments will exceed $330 billion by 2027, up from $57 billion in 2023. Europe will account for 75% of the total in five years, according to Juniper Research.

250m potential end users

50% Open Banking users will be in the EU by 2027

8x volume growth year-on-year

What does Open Banking mean for my business and customers?

In the age of commoditization and squeezed margins, payment service providers are looking for new revenue sources beyond traditional transaction switching and payments.

There’s huge scope to build out functionality and adjacencies in your service offering, especially before and after the moment of payment. For example data-driven features, factored loans, accounting plug-ins and enhanced reporting.

You’re also well-positioned to leverage industry investments in Open Banking and real-time payment technology. Whether that’s to gain competitive differentiation, increase revenue, cut costs or all three.

Anyone looking to future-proof their businesses can use Open Banking to re-shape customer value propositions. But also, how you help your customers incorporate Open Banking into their own products and services.

As to end-users, your customers’ customers expect more. They’re digital-first, hyperconnected and always-on. And are known to switch for a better solution or UX, as the popularity of Square, Venmo, Paypal and Wise shows. Open Banking payments deliver on their needs, too.

Benefits to PSPs

• Gain competitive differentiation – future-proof your business, compete strongly in the digital remittance, pay-in/pay-out space and grow market share by providing innovative payment solutions.
• Increase revenue – appeal to new customers and increase spend from existing customers by providing direct pay-in/pay-out functionality across thousands of local bank accounts.
• Cut costs – cheaper, chargeback-free payments with faster settlement drive a compelling cost story for you and your customers.

Benefits to businesses (Retail, iGaming, banking and more)

Increase revenue

• Attract new customers – with 20% of consumers abandoning their purchase if their preferred payment method is not offered, better bank payments help turn browsers into buyers.
• Improve ATV – a great UX and a choice of payment methods customers know and trust help drive spend, loyalty and, ultimately, revenue.
• Boost acceptance rates – bank-to-bank payment success rates are higher than traditional payment methods in many markets.

Cut costs

• Reduce cost of payment acceptance – no card scheme or interchange fees mean an additional low-cost payment option for your customers.
• Eliminate chargebacks and associated costs – A2A ‘push’-style payments have no built-in chargeback rights, saving time, cost and admin hassle for everyone.
• Decrease false declines – secure user authentication through banking apps helps lower false positives and the cost of declined payments for your customers.

Improve business

• Improve cashflow – real-time funds transfer is faster than cards, which brings an array of benefits for cashflow and working capital efficiency.
• Expand cross-border easily – power your global ambitions by offering the convenience and choice of local bank payment.
• Optimize fraud prevention – with no need to store, process or transmit card details, the opportunities for fraud are minimized.

Benefits to end-users (Consumers and businesses)

• Convenience – Open Banking payments are slicker and quicker than topping up wallets, typing in card details or manually completing an old-style bank transfer.
• Coverage – make local bank payments to sellers globally with a familiar bank interface they know and trust.
• Speed – to pay, customers select bank transfer, find their bank and confirm payment. It’s that simple and funds transfer is instant or near-instant.
• Security – customers approve payments within their own banking app, so sensitive card details are never shared or stored.

10 features of Open Banking payments

1. Acceptance rate – A2A payment success rates are higher than traditional payments in many markets.
2. App to app – funds move direct from one account to another, cutting both intermediaries and costs.
3. Chargebacks – ‘push’ payments from one account to another have no built-in chargebacks, which are often named as a top payment pain point.
4. Cost – no card scheme or interchange fees result in a lower cost payment option.
5. Coverage – thousands of local bank accounts are available via a single API connection.
6. Decline rate – false declines are reduced with secure user authentication through banking apps.
7. Instant transaction notification – payments are individually confirmed to both parties or rejected for increased certainty, better reconciliation and control.
8. No 3D secure or SCA – authenticate simply online or via banking app, often with face or finger.
9. Security – no need for sensitive card data to be shared or stored, which reduces PCI DSS scope.
10. Settlement – funds are available on account in or near real-time for better cashflow.