How Open Banking Revolutionised Payments & More

Open banking, a relatively new concept in finance, is rapidly gaining momentum. Previously, traditional banks held an exclusive monopoly over customer data. In Europe, this was ended in 2018 with the PSD2 regulation. It mandated banks to share information with licensed third-party providers, strictly with customer consent, of course. The data sharing happens via secure APIs, which act as a bridge between different software.

Open banking payments increase in adoption

The key benefit of open banking is its potential to improve online payment processing for customers and merchants. Open banking enabled the new payment method referred to at Noda as “pay-by-bank.” It’s an account-to-account (A2A) transaction without the involvement of card networks. Customers are redirected to their trusted bank’s interface and complete authorisation there. Only licensed PISP providers like Noda can offer this service.

Pay-by-bank is superior to traditional card payments in many ways. First, it offers a much quicker and smoother user experience (UX). Customers don’t need to manually enter their payment details, as they’re redirected to their bank’s app or website, depending on the device they use. This results in frictionless checkout and less cart abandonment.

Secondly, pay-by-bank payments are secure. Measures such as strong customer authentication (SCA), which requires verification by multiple factors, are a legal requirement. Plus, data sharing happens via regulated APIs rather than screen scraping.

Customers value convenience and safety, so this type of payment is becoming their favourite. According to Open Banking UK, 9.7 million payments were made in June 2023, a surge of 88% from 2022. There were further 10.8 million payments in August. Over 11% of British consumers are active users of open banking, and 17% of small businesses also adopt this innovative tool.

And this trend is likely to accelerate. Statista forecasts A2A payments to grow by 14% annually between 2023 and 2027. Currently classified as an alternative payment method, this will place pay-by-bank into the mainstream. Meanwhile, Juniper Research predicts open banking transactions to reach $330bn in value by 2027. That’s from $57bn in 2023, a total of 479% market growth.

Innovative potential of open banking data products

Yet payments are just the tip of the iceberg of open banking potential. There is a whole other field related to open banking data. In PSD2, third-party providers can also obtain an AISP license, which allows them to gather customer data from different sources and put it into a single interface. Think of budgeting apps that allow users to connect different bank accounts.

For businesses, this offers numerous opportunities and data products. For example, at Noda, we offer Know Your Whales (KYW), which is an analytics tool that provides customer insights. Merchants can use KYW to target clients of high lifetime value (LTV), improve client engagement, build re-marketing campaigns and develop personalised products.

Open banking tools can also be used for onboarding and compliance processes such as Know Your Clients (KYC). They enable instant data retrieval for client verification. At Noda, for example, we offer Pay & Go, which allows businesses to onboard their clients with non-ID upload and liveness detection. The solution covers onboarding, verification and the first deposit.

Open banking tools offer value in lending, too, allowing companies to quickly verify income, wealth and affordability. Lenders can minimise human error and avoid piles of physical documents, as the data is digitalised and gathered in one place.

Plus, this is beneficial for better financial inclusion. The use of near real-time financial data means that lenders take into account wider criteria than in traditional eligibility assessments. This means more people can get approved, potentially even those without a credit history.

Future of open banking

In future, open finance is a possibility. It’s the next step from open banking towards wider data transparency. In open finance, more financial institutions openly share information, including asset managers, investment funds, pensions, insurers, mortgage providers, and more. In fact, open finance is already a reality in Brazil. The country finalised implementation in 2023.

In the immediate future, open banking adoption will depend on regulation. PSD3, an update from the groundbreaking European regulation, will be finalised in 2024. It promises more standardised APIs and better security features. Meanwhile, in the US, the CFPB proposed a new regulation that will promote open banking. As open banking moves towards mainstream acceptance, its potential promises better payments, data products and greater financial inclusivity.