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Open Banking: Overview

Open banking

Open Banking is transforming the way merchants accept payments online and giving consumers greater control of how they pay
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What is Open Banking?The role of PSD2 in Open BankingWhy do consumers prefer online bank payments?Open Banking: advantages for merchantsGlossary of financial acronyms

What is Open Banking?

Open Banking technology is the secure new way for banking clients and merchants to manage their money better, enable direct payments, and cut out costly intermediaries. A collaborative banking framework helps everyone take control of their banking activities and benefit from the latest financial service providers and innovative services. That means transactions and other financial activities can be shared easily via APIs (application programming interfaces). In short, it will lead to better banking and payments for all.

The future of banking and payments is digital

A quiet revolution has been underway over the last 15 years or so in shopping, banking and payment processing. It began with hard cash increasingly being replaced by card payments, and online shopping becoming the dominant way of life. The pandemic of the last few years has accelerated this situation. And as the digital generation has come of age, growing into mature buyers, it became inevitable that payment technology would transform and flourish.

Digital channels have now fully emerged and there has been a huge increase in e-customers and especially mobile eCommerce. This has had a big influence on the online banking sector; over 75% of banking clients in North America and Europe now carry out the majority of their transactions online.

Driven by the spread of COVID-19 in early 2020, those consumers moving over to online payments shot up by almost 50% and this was mirrored by digital banking usage. The growing popularity of tap-to-pay transactions, QR codes and other payment innovations has also continued to rise.

This shift in payment channels has resulted in a fast-changing online banking industry that is predicted to double its revenue in only 7 years to reach over $20 billion by 2026.

The role of PSD2 in Open Banking

An important aspect of Open Banking is the role of PSD2 (Second Payment Services Directive), which is a payments legislation introduced by the European Union in September 2019. This legislation gives EU consumers the right of ‘data portability’ and allows them greater flexibility of their financial information. PSD2 has really put Europe at the very centre of Open Banking because of the new legal and technological landscape it has enabled. It is expected to boost the strength and frequency of digital payments online.

The importance of PSD2 rests on the European regulatory framework that permits third parties to receive verified and safe access to accounts in order to manage payment details. Open Banking payments can now be triggered with the approval of customers. This crucial development has given Open Banking the power to evolve across Europe.

The importance of PSD2 rests on the European regulatory framework that permits third parties to receive verified and safe access to accounts in order to manage payment details. Open Banking payments can now be triggered with the approval of customers. This crucial development has given Open Banking the power to evolve across Europe.

Due to PSD2, all banks are now required to deal with payments initiated by legitimate third-party service providers known as PISPs (Payment Initiation Service Providers). This means that Open Banking has become a convenient new way for consumers to use online bank payments to fund merchants. Because of this, processing payments via online bank payments is growing rapidly.

Open Banking: a more flexible future

An added bonus of this is that smart services can offer additional tools such as budgeting, financial management and cashflow analysis to add extra value for digital consumers.

Many innovations and quality tools have yet to be fully realised by fintech developers, which means that for now the main focus of Open Banking has been on helping consumers make payments using direct bank transfers.

The root of the change has been PSD2, because it directs all banks to give access to legitimate third parties (known as PISPs) in order to trigger payments. This has already resulted in more payments to European merchants via bank transfer.
The essence of Open Banking stems from the availability of financial data across different providers. This theoretically means that consumers could compare and manage all of their financial data inside one app, despite having numerous financial accounts.

The security underpinning PSD2

At the heart of PSD2 is the requirement for merchants to uphold Strong Customer Authentication (SCA). In order to ensure security and fraud prevention, it is necessary for merchants to add the tools to their online checkout or payment point that meet authentication requirements (introduced in the EEA by January 2021 and the UK by March 2022). Merchants must adapt a range of security measures specified such as password, PIN, token, fingerprint or other accepted forms of security identification. PISPs, fintech developers and merchants are now hard at work meeting the challenges of these security measures.

Why do consumers prefer online bank payments?

The reason is simplicity itself – consumers get satisfaction and security from making direct payments from their bank. The benefits of online bank payments are clear and easy to understand:

  1. Ease of use: Open Banking payments are efficient because consumers simply need to confirm one time only to validate a payment service. It is then possible to make direct payments from a bank account whenever they want without the need for any card or other details.
  2. Security: Because Open Banking relies on the customer’s own bank account, with its built-in security guarantees, there is a great feeling of trust that is transferred to all Open Banking activities. So, every purchase is made in the same safe way whether it’s buying a subscription online or paying for goods.
  3. Speed: Instant transfers have only become possible relatively recently, and Open Banking has benefited greatly from this development. Funds can now be sent in real-time giving greater confidence and convenience when making payments. That means subscriptions, tickets and other services are available faster.
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Open Banking: advantages for merchants

The development of Open Banking not only empowers the consumer but also gives merchants a fantastic opportunity. The ease of use, safety and simplicity of online banking payments means that funds are transferred instantly from customer bank account to merchant. Therefore, merchants can benefit by removing payment intermediaries from the process, lowering fees, and boosting cashflow. Merchants are able to enjoy a range of benefits:

  1. Increased conversion rate – By delivering more efficient payment processing, customers will experience less hassle, higher satisfaction and show greater loyalty to brands and services. A more comfortable customer journey, especially at the checkout or point of payment, is always going to give an advantage to merchants. Payment by bank transfer is set to grow and may even become the leading way to pay, so merchants who catch the wave at the right time have the best chance to boost conversion.
  2. Lower fees – One of the clearest advantages of Open Banking payments is that, by choosing the right service, merchants can reduce their processing costs and enjoy fee flexibility. At last merchants have the chance to cut out traditional intermediaries, such as card networks, that have long been dominant.
  3. Fraud prevention – Because Open Banking is built on existing bank structures, it automatically comes with bank-level security, 256-bit encryption and multi-factor authentication. Customers use the same bank login details so they don’t need to share more information to make payments. The existing checks maintain fraud prevention and often mean zero chargebacks.
  4. Greater transparency – There is nothing more satisfying for both consumers and merchants alike than to witness a payment being processed almost immediately. Instant payments increase trust and boost cashflow.
  5. Instant refunds: If the right technology is incorporated (i.e., PISPs), then delivering refunds to customers can also be done immediately with Open Banking. This speedy approach to dishing out refunds is a good way to strengthen brand loyalty.
  6. Cross-border flexibility: Open Banking with a full-service PISP also offers geographical efficiency for merchants looking to handle payments in different currencies and payment types. Currency payment processing can include conversions when dealing with cross-border payments.

Glossary of financial acronyms

The financial world involves a range of acronyms and technical jargon including PISP, PSD2, and API. If you really want to understand them, we’ve given you a quick explanation below:

AIS: Account Information Services – this refers to a service (e.g., financial products or money management) gathering a client’s essential account details including balance history, transactions, and other account information to offer assistance.

AISP: Account Information Service Provider – a third party serving up Account Information Services (AIS) to merchants.

API: Application Programming Interface – this enables third party service providers (AISP/PISP) to access bank accounts and collaborate.

ASPSP: Account Servicing Payments Services Provider – most commonly a bank or company that provides the customer’s payment account.

MCI: Modified Customer Interface – this piece of technology gives third party providers an approved certificate to identify their service to the bank in a secure manner.

PIS: Payment Initiation Services – A third party service involved in triggering the payment via direct banking after a consumer’s action (e.g., when a purchase is made and the checkout payment option chosen).

PISP: Payments Initiation Services Provider – this is a fully licenced third-party service provider delivering PIS (Payment Initiation Services) to merchants.

PSD2: The Second Payment Services Directive, an EU payments legislation (September 2019) aimed at providing consumers with ‘data portability’ of bank details and strengthening digital payments.

RTS: Regulatory Technical Standards – part of the framework of PSD2, which oversees interaction standards and customer authentication.

SCA: Strong Customer Authentication – this maintains security standards and the authentication of payments.

TPP: Third Party Provider – the approved provider responsible for linking banks to AIS or PIS services.