OPEN BANKING IN THE U.S.:
THE STATE OF PLAY
This article is republished with permission. It was first published on January 23, 2024. Click here to access the report via The Paypers.
In the U.S., market-led initiatives have become the driving force behind open banking – a secure data-sharing approach enabled through application programming interfaces (APIs).
The emerging trend is helping to create seamless integration between service providers – including banks, fintechs and alternative financiers – and driving increased collaboration between banks and third parties. Rather than viewing these parties as competition, financial institutions (FIs) are embracing the wealth of partnership opportunities to leverage new technologies, improve their offerings and facilitate ease of access to a range of solutions to optimize their clients’ experience.
The open banking landscape in the U.S. is also helping to improve processes across financial services. From account verification and KYC, personalized financial advice, bill payment reminders, to even providing financial education to consumers – it is expanding the abilities of banks, improving the service provided to clients and, in turn, their end-clients.
But where might open banking have the biggest impact, and how can the industry unlock its full potential?
Open banking transforming B2C payments
Open banking has the potential to significantly improve B2C capabilities and services to resolve many of the industry’s current shortcomings. By empowering consumers and businesses to securely share their account data with trusted third parties, banks and fintechs together will be able to utilize this information to craft bespoke products that better serve clients and their needs.
When open banking capabilities are embedded into online platforms, businesses can offer their end customers the ability to seamlessly initiate payments directly from their bank accounts. This facilitates the flow of payment data between the end customer, the corporate and the bank – benefiting all parties in the payment process.
Combining the payment expertise of trusted FIs with the open banking capabilities of fintechs brings synergies that complement the core competencies of each. Banks can provide exceptional services in execution, reconciliation and security, while fintechs take this expertise and wrap it up in a user-friendly, streamlined service that provides an improved experience for clients – both businesses and consumers alike.
Such is the case with BNY Mellon’s recent endeavor with Bankify℠ , an open banking payments solution co-developed with Trustly that is designed to provide clients with a low-cost, secure and efficient alternative to existing methods. Potential clients of the new service include merchants, billers, or financial service providers using the capability for account funding, with use cases including online purchases, funding investment accounts, consumer bill payments, student loans and auto loans, among others.
Open banking in action
Picture the scene: an electricity company has reached out to one of its customers requesting this month’s bill payment. Typically, the customer would choose to pay this bill using their credit or debit card. While this is relatively seamless for the customer, from the biller's perspective, the high associated interchange fees mean this payment method comes with significant downsides.
Now, and thanks to the collaboration with Trustly, when the customer gets to the checkout screen there are multiple payment options for the customer to choose from, including Bankify’s "pay by bank" option. By picking this option, the customer’s bank account information is retrieved and validated through an authorized framework – at once confirming that the account details belong to the customer and that the requested funds are available. Once these details have been validated, the customer simply clicks "pay" and the payment is taken directly from their account.
For the customer, the payment experience is quick and seamless, while for the merchant the settlement of the payment is guaranteed for ACH payments – reducing the risk of returns and chargebacks – and comes with considerable cost savings compared to comparable payment methods.
Realizing open banking’s full potential
More broadly, open banking has sent ripples throughout the industry, but there is still progress to be made to achieve its maximum potential. A pervading issue is the lack of harmonization and standardization in creating industry API frameworks, which has resulted in a litany of templates and tools that are available to developers to create innovative products and services. Due to this, the vast majority of banks are forced to create their own API frameworks with their fintech partners. This is both expensive and time-consuming.
What’s more, without a standardized approach, banks will find themselves set apart from others in what products and services they can provide to their customers. This is the direct opposite of what open banking is attempting to achieve, which is to level the playing field for third-party providers and inspire innovation and collaboration.
Certainly, open banking is a tool that will propel banking services into the future. It is important for the industry to continue working together with the collective ambition of creating a standardized approach, so that progress in developing products remains evenly distributed, enabling the industry to continue innovating together.
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