By Steven Jones, Open Banking Specialist at Nuapay
Seamless and secure payment experiences are no longer a luxury, they're a necessity. Consumers expect a frictionless journey when it comes to digital payments, from one-click purchases online to effortless bill payments over the phone. On the other hand, businesses grapple with ensuring secure, cost-effective payment solutions while meeting stringent compliance regulations. Enter Open Banking, a revolutionary technology poised to transform the way we interact with our finances. In 2023, Open Banking transactions values were $57bn, but growth is on the horizon according to Juniper Research, which predicts Open Banking payment transactions’ combined global value will grow to more than $330bn globally by 2027. The UK is noted to be leading the charge with account-to-account payments with 17.38M payments made in May 2024.
What is Open Banking?
Open Banking, in essence, opens doors for innovation in the financial sector. It utilises secure APIs (Application Programming Interfaces) to grant authorised third-party providers (TPPs) access to a customer's financial data with their explicit consent. Think of it as unlocking a treasure trove of financial information, allowing authorised parties to initiate a variety of actions on your behalf, all within a secure and regulated framework. Open Banking payments are also often referred to as ‘account-to-account payments’ or presented simply as the option to ‘Pay by Bank’.
A brief history of Open Banking in the UK and Europe
Open Banking emerged in the UK in 2018 driven by the Open Banking Implementation Entity (OBIE), a not-for-profit organisation established by the Competition and Markets Authority (CMA). This initiative aimed to create a more competitive and innovative financial services landscape by fostering collaboration between traditional banks and new fintech players both within the UK and Europe.
Fast forward to 2024 and we are seeing 1 in 9 Brits using the new payment method with average transaction values of around £450, with the total monthly value of Open Banking payments at around £4.5bn in the UK.
This highlights the growth of Open Banking as a payment method in a relatively short period. It’s not just in the UK too as France, Poland and the Netherlands have seen strong account-to-account payments growth in the last decade. However, it is worth noting that there are a few differences in the number of services available through Open Banking in the EU compared to the UK.
Two sides of the Open Banking coin: AIS & PIS
Open Banking encompasses two distinct functionalities, each offering unique benefits:
- Account Information Services (AIS): AIS empowers TPPs to access a customer's account information, such as transaction history and current balance. This information can be invaluable for budgeting apps, financial management tools, and price comparison services, allowing them to provide users with a more holistic view of their finances
- Payment Initiation Services (PIS): PIS allows TPPs to initiate secure Account-to-Account (A2A) payments directly from a customer's bank account, bypassing traditional methods like debit or credit cards. This streamlined approach not only expedites the payment process but can also result in significant cost savings. PIS is considered as the next generation of bank transfer as it does not require any data entry
Some TPPs like Nuapay can complete both AIS and PIS. They must be a licensed entity to do this, which Nuapay is in both the UK and Europe. It is worth noting that some businesses may only have access to AIS for customer verification purposes and therefore will not have access to instant Open Banking payments.
Who uses Open Banking?
The benefits of Open Banking extend to a diverse range of stakeholders:
- Financial services organisations: Banks, fintechs and building societies can leverage Open Banking to develop innovative financial products and services tailored to individual customer needs
- Businesses: From e-commerce platforms to contact/call centres, businesses can streamline their payment journeys, reduce costs, and enhance security through Open Banking solutions
- Everyday consumers: Consumers gain greater control over their finances, benefitting from faster payments, improved budgeting tools, and potentially lower transaction fees with Open Banking
The willingness to adopt Open Banking varies among these different groups. However, with 93% of UK adults using online banking and 74% using their mobile devices to manage their finances every day, consumers appear ready to take advantage of the benefits of instant bank payments.
What’s wrong with the existing traditional payment methods?
Open Banking was devised as a solution to improve the way that consumers and businesses pay and get paid. While existing payment methods like debit and credit cards and cash have been used by businesses and consumers alike, they come with limitations, such as:
Slow processing times: Traditional payment methods often involve delays in settlement, which can disrupt cash flow for businesses
High fees: Businesses often incur significant transaction fees associated with credit card processing, impacting their profitability
Security concerns: Fraudulent activity remains a concern with card-based transactions, requiring businesses to invest in additional security measures
What are the benefits of Open Banking?
Open Banking offers a compelling solution to the limitations of traditional methods, presenting numerous benefits for both businesses and consumers:
Business benefits:
- Faster payments: Open Banking facilitates instant or near-instant account-to-account payments, improving cash flow management and reducing waiting times
- Reduced fees: By bypassing card networks and associated fees, businesses can enjoy significant cost savings with account-to-account payments (typically 40-60% cheaper than card payments)
- Simplified ayment journeys: Account-to-account payments streamline the payment process, minimising customer drop-off rates and fostering a smoother user experience (UX)
- Enhanced security: Instant bank payments leverage strong customer authentication (SCA) protocols, ensuring robust security for both businesses and their customers
- Payment link flexibility: Open Banking enables the creation of secure payment links, such as Digital allowing customers to effortlessly complete transactions from any device
- Payment API integration: Businesses can integrate Open Banking functionalities seamlessly into their existing systems through APIs, streamlining operations
- Improved payment compliance: Open Banking businesses adhere to stringent regulations set by the FCA ACPR, PSR European Council and the OBL ensuring strict compliance for such businesses
Consumer benefits:
- Seamless payment experiences: Consumers can enjoy quicker payments without the need for data entry (avoiding errors) in a familiar banking environment with instant bank payments when compared with card transactions
- Confirmation of payee: account-to-account payments give the payee peace of mind that the funds are being sent to the correct recipient
- Faster refunds: Instant bank payments facilitate faster and more secure refunds, improving customer satisfaction
A win-win for businesses and consumers
We can see the benefits of adding Open Banking to the checkout to give our customers more choice. Open Banking goes beyond revolutionising payments. It fosters collaboration, leading to innovative financial solutions for businesses and consumers. Businesses benefit from faster settlements, lower fees, more efficient operations and customer journeys, and enhanced security. Open Banking APIs also integrate seamlessly with existing systems, boosting efficiency and compliance. Consumers gain control of their finances with faster refunds, and a more convenient payment experience.
At Sycurio, we strive to give our merchant customers and their customers a seamless payment experience and choice at check-out… through our partnership with Nuapay we can provide Open Banking as an alternative payment method.
