Open Banking and Online Payments

Beyond traditional banking
November 24, 2022 | Expertise

Open banking begins with a simple premise: financial data belongs to the customer, not the bank. Open banking is built upon open source technology that allows financial service providers to deliver services by integrating directly with customers’ bank accounts, and has transformed the digital payments sphere in recent months.

What is open banking?

The concept of open banking has been around since 2018, and is a direct consequence of the European Union’s Payment Service Directive 2. The directive mandates the sharing of data between banks and technical providers. These providers fall into two categories: account information service providers (AISPs) and payment initiation service providers (PISPs). AISPs provide informational services, such as collating read-only financial information from multiple bank accounts or categorizing expenses to help users monitor their outlays and budget accordingly. PISPs facilitate payments; with customers' consent, they can initiate transfers between bank accounts. This provides users with a convenient means of making account to account payments without needing to repeatedly enter the same data. 

PISPs can be broken down further into two groups, resellers and integrators. Integrators like Trustly, Tink and GoCardless integrate directly with bank APIs. They are registered with the banks and can work with them directly on technical upgrades. Resellers like Volt and Vyne resell solutions with a new front end. All theses PISPs facilitate account-to-account payments, but some offer additional services. For example Trustly provides informational services like affordability analysis and Tink offers a money manager, income and expense checks and risk insights. These features are used by banks and financial institutions to offer their customers additional services.

Providers access customers’ banking information via an application programming interface (API) that allows data to be shared securely and for transactions to be initiated. This opens up the market to new players, from fintech startups to established technology companies. It is up to consumers to choose whether to share their financial data with third-party providers and other financial institutions. 

Open banking is mandatory across Europe and is increasingly supported by regulators around the globe. This support and its rapid adoption by users positions open banking as a  long-term player in the world of online payments.

"Open Banking is an innovative solution that offers many opportunities, advantages and savings. Our instant account-to-account payments are designed to boost conversions, reduce costs and streamline cash flows for our customers."
Chris Masters
Strategic Partnerships at Vyne

What is the Payment Service Directive?

Following the growth of online shopping, the European Union implemented the Payment Services Directive (PSD) to protect consumers and merchants. This legislation first came into force in 2007, but an update (PSD2) was proposed in 2015 and came into effect in 2018.

PSD2 reflected changes to the market since 2007 and introduced improved security and consumer protection in the form of SCA (Secure Customer Authentication). SCA, a multi-factor authentication (MFA) solution which uses at least two out of three possible forms of identification to complete an online purchases, is now mandatory across the EU for the majority of electronic payments. Other measures were intended to foster innovation, lower the barrier to entry and encourage new forms of online payments. Banks were required to provide interfaces for third-party providers, creating the foundations of open banking.

Open banking drivers: market demand and customer expectations

The digital transformation has brought about significant changes in online behavior and the growth of online commerce, which in turn have contributed to the rise of open banking. As consumers switch from traditional to digital banking, they are increasingly demanding fast, accessible and convenient modes of payment via mobile apps. Digital payments were given a further boost by the COVID-19 pandemic, which forced a significant share of shopping online, and provided the perfect conditions for the technology to thrive.

Another change to the payment landscape has been the rise of alternative payment methods. Banks are increasingly under pressure to adapt and compete with tech giant offerings in digital wallets such as Google Pay and Apple Wallet. However, modernizing their IT systems is expensive and time-consuming. Providing third parties with access to banking information via an API has created a niche for fintechs and start-ups to fill this gap and deliver banking services to consumers directly.

Consumers can now download a variety of apps that interface directly with their existing bank accounts and deliver services that no longer need to be provided directly by banks. These range from AISPs providing consumers with a convenient way to track their finances across multiple bank accounts to financial advice and account to account (A2A) payments. Open banking is also making inroads into the public sector, with HMRC in the UK offering the option to pay taxes via an open banking integration.

"Tink provides scalable data and payments solutions based on a single platform for more than 300 banks and fintechs worldwide. We enable our customers to create exceptional user experiences by building next generation data-driven financial services.”
Hannes Rogall
Managing Director at Tink Germany

What challenges does open banking face?

There are however some significant challenges with open banking. While open banking providers operate all over the world, no provider currently offers a global solution. Instead, providers focus on specific countries or regions, working with local banks. Global merchants offering services worldwide need to integrate multiple PISPs to cover all their markets. This challenge is exacerbated by a patchwork of regulations, with legislation and policy objectives differing sharply by jurisdiction. However the overall global trend is encouraging and many countries support open banking without mandating it. 

Examples of jurisdictions where open banking is mandatory include the UK, EU, Australia and Hong Kong, with the US moving in this direction with the Dodd-Frank act and other upcoming legislation. In other regions, open banking is not mandatory or only mandatory for a subset of banks and financial institutions. Many countries in Latin America are supportive of open banking: Mexico introduced legislation in 2018 mandating a standardized API, Chile announced a proposal to introduce an open banking standard in 2020, and Colombia has announced interest in a voluntary open banking standard. Brazil’s central bank has deployed open banking and implementation is mandatory for large institutions, those with significant international activity and high risk profiles, but not for others. There are also moves towards open banking in Africa, with the Nigerian central bank promoting a common API, South Africa’s 2 largest banks introducing open banking during the pandemic (with 4 more joining since then), and banks like NMB in Tanzania adopting open banking.

Another complicating factor is the patchwork of different APIs, rather than a common standard. While the UK decided to adopt a uniform API for all banks, there is no continent-wide standard across the EU as a whole. Instead, there are country-specific and bank-specific implementations. The adoption of a single, interoperable API would go a long way to removing friction and simplifying the process of integrating third party offerings with banking infrastructure, something that legislators are beginning to realize.

"Our goal is to enable merchants and their customers to move money at lightning speed, wherever they are. By uniting domestic instant payment systems, such as Faster Payments in the UK, SEPA in Europe and Pix in Brazil, we've created a single point of access to the world of open banking. This gives businesses everywhere the opportunity to capitalize on the real-time payments revolution via a single API.”
Steffen Vollert
Co-founder & Chief Operating Officer at Volt

Why is open banking interesting for merchants?

Open banking is expected to grow by around 25% this year, from $15.13 bn in 2021 to $ 19.115bn in 2022. Forecasts expect growth to remain at this level, with open banking projected to grow to almost $50bn by 2026. More and more merchants are adopting open banking, as it provides a streamlined, cheaper service than some traditional payment methods like credit cards.

Benefits of using a provider like Volt, Trustly, Vyne, GoCardless or Tink include:

  • Seamless payment experience: Customers do not need to provide much data and frictionless strong customer authentication (SCA) lowers the risk of cart abandonment while improving the customer experience.
  • Increased acceptance rates: With a success rate of over 95%, open banking is one of the most reliable online payment methods, benefitting both customers and merchants. 
  • Lower Processing fees: Open banking is an account to account payment method, cutting out intermediaries. This means the cost of processing payments is reduced significantly and merchants avoid interchange fees. 
  • Instant settlements: Open banking payments can be instantaneous, depending on the region (e.g. UK, SEPA Instant). This provides greater security for merchants, who do not have to wait for payments to be transferred and reduces the risk of false positives.
  • No chargebacks: Open banking does not allow for chargebacks, which are a big risk to merchants and can heavily affect their bottom line. Payments processing is incredibly secure and the risk of fraud is minimal. This protects both the merchant and customer.
"Trustly delivers cross border Open Banking as well as best in class localization. Over 10m European consumers have used Trustly the last year. Our customers are able to accept payments, make payouts and access valuable user data all via our single API integrated to IXOPAY.”
Ciaran O’Malley
Vice President of Financial Services & Ecommerce at Trustly

What is the future of open banking?

Open banking will continue to foster innovation, as service providers develop new services. While banks and financial institutions were initially wary of fintechs, transparency and open collaboration is now being seen as an opportunity for growth and diversification. Innovation is no longer the sole remit of banks; the fintech sector is now creating cutting-edge solutions that replace old-fashioned banking products. This delivers added value to consumers in the form of financial and payment services, without banks needing to implement their own solutions. We have only seen the tip of the iceberg and can expect more innovative solutions in the future. 

The adoption of a single standard API would go a long way towards making it easier for providers to integrate with all banks and financial institutions, and the first steps have been taken in this direction in Europe. Whether this will take the form of a single standard API or be solved using middleware that provides a single access point for multiple APIs remains to be seen. This should serve as a warning for those jurisdictions that have not yet fully embraced open banking, as they can avoid making the same mistakes. There is a lot of interest globally, and we can expect to see open banking adopted across more and more regions.

Consumer surveys show that many consumers are still unfamiliar with open banking, with only around 10% of digitally enabled consumers in the UK estimated to be active users of an open banking service in June 2022. However, with SCA (especially for card payments) in full flow, this is likely to change as consumers switch to open banking solutions and the streamlined checkout they offer. The number of open banking transactions is currently growing rapidly. Month on month growth is at around 10% in the UK, with 21.1m transactions in the 6 month period up to March 2022, compared with just 6.1m in the same period the previous year.

Banks should make strategic use of open banking, monitoring how it improves business by delivering an outstanding customer experience, increased conversion rates and faster onboarding. Banks themselves can benefit from the offerings of third parties, as these provide the banks’ customers with an improved banking experience without requiring banks to invest directly in development.

“We believe access to open banking data should be free. We can now offer it at scale to anyone (...) looking to solve customer problems.”
Hiroki Takeuchi
GoCardless CEO

Why open banking and payment orchestration?

As open banking is heavily fragmented and providers are focussed on specific regions, global merchants need to factor this in when choosing a payment solution. A merchant active in Latin America and Australia will require at least two open banking providers to cover both regions, if not more. However, implementing and maintaining multiple integrations is costly and time consuming, and consumers will continue to use other payment methods as well. 

Merchants need to offer a wide variety of payment options catering to the local market to avoid cart abandonment. With a payment orchestration platform like IXOPAY, merchants can connect to multiple open banking providers and other PSPs via a single API, giving them access to A2A payments across all markets. A list of the providers supported by IXOPAY can be found here. The list includes open banking providers as well as other payment providers.

To find out more about open banking and other local and alternative payment methods, get in touch with our team, who can offer advice on payment setups and coverage.

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IXOPAY is a payments orchestration platform enabling independent, flexible and global payment processing. As a highly scalable and PCI-DSS certified “fintech enabler”, IXOPAY fulfills the needs of large merchants as well as those of “white label” clients: payment service providers (PSPs), acquirers and independent sales organizations (ISOs). The modern, easily extendable architecture offers smart transaction routing & cascading, state-of-the-art risk & fraud management, fully automated reconciliation and settlements processing, comprehensive reporting as well as plugin-based integration of acquirers, payment service providers and alternative payment methods (APMs).

IXOPAY is part of the IXOLIT Group, founded in Vienna, Austria in 2001. With local entities in Austria and the USA, IXOLIT supports national and international customers across various industry verticals. The owner-led and -financed company has grown from 2 to more than 80 employees and is focused on building innovative solutions for eCommerce.

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