The impact of Open Banking is a mystery the world has yet to understand. It will change the way payments are managed, not just in the UK but around the world. The objective is to improve competition and innovation in the payment industry, which reinforces the UK’s position at the forefront of payments. This is great news for consumers and businesses of all sizes for whom payments will become easier, more secure, and with an improved user experience.
From January 2018, the principal UK banks will be required to use standard APIs to open up their payment systems. A new regulatory category of Third Party Providers (TPPs) will use these APIs to develop innovative payment and cash management services for business and consumer customers. TPPs will need to become regulated by the Financial Conduct Authority and, provided they have been duly authorised by banks’ customers, these TPPs will access bank accounts and payment systems to provide Payment Initiation Services and Account Information Services on a multi-bank basis. In addition to banks and fintech firms opting to become TPPs, major retailers and technology giants with large customer bases will also develop innovative payment services to reduce their own processing costs and improve the customer experience of paying for goods and services.
Open Banking will encourage the development of new solutions for many different segments of customer, such as apps that help consumers find the best investment or borrowing offers in the market as well as apps that help businesses manage their cash more efficiently and forecast their working capital requirements using data analytics. Competition will intensify, with new entrants offering innovative value propositions and new business models. But Open Banking is also driving unprecedented levels of collaboration between banks and fintech providers which recognise the mutual benefits of partnering to capitalise on the combined advantages of scale, large customer bases, economic muscle and innovation.
Open Banking’s influence will reach far beyond UK borders
Open Banking is broadly aligned with another major initiative in Europe, PSD2, which also seeks to drive competition and innovation across the EU. But PSD2 has been less prescriptive than Open Banking and has remained technology neutral on how EU banks should implement the directive. This opens up a risk of disparate interpretations of the directive’s requirements and the development of multiple standards, thereby creating unintended barriers for TPPs wishing to provide a pan-European solution.
There has been much debate about certain technical aspects of PSD2 which looks likely to delay full implementation of the directive until their Regulatory Technical Specifications become effective, probably not until 2019. Meanwhile, Open Banking remains impressively on schedule and has published a single set of open standards to implement the new business model in January 2018. It is ironic that, just at the time when the UK is negotiating Brexit, EU banks may conclude that the most practical way to comply with PSD2 is to adopt the standards and specifications already developed and about to be deployed in the UK under Open Banking.
But it is not just Europe which is being influenced by the template being created in the UK with this new era of APIs and Open Banking. Major banks in the US and Australia are recognising the need to remain competitive and innovative and, pre-empting any future regulation, they are already opting to develop open APIs, hence encouraging the creation of new solutions in payments, cash management and trade finance. A growing number of banks and regulators around the world are observing the progress of the UK payment industry and may well follow their lead, concluding that open APIs are good for the consumer and for business.
Easier payments & cash management
There are exciting opportunities ahead for UK businesses under Open Banking: They will be able to connect with all their UK bank accounts via a single TPP and view all their bank statements on a single cloud-based platform, at the same time as managing all their payments at multiple banks. They will also be able to use the same platform to access other value add capabilities, such as reconciliation and cash flow forecasting. The phased introduction of Open Banking and subsequently PSD2 presents corporates with an exciting opportunity to integrate their UK and European payments and cash management more efficiently.
Fintech firms with expertise in cloud services and multi-banking and multi-protocol solutions will be well placed to develop new services under Open Banking. They will use banks’ open APIs to enable corporate customers to initiate payments and aggregate statement information from multiple banks across UK and Europe. At present, automated balance and transaction capture services and multi-bank payments solutions are usually only available to larger corporates and banks using SWIFT to access multiple banks. But these new API-enabled payments and account capture services are a natural extension of existing SWIFT capabilities offered by Aggregator Service Providers.
SWIFT capabilities will continue to play a key role in global cash management solutions in other regions, but it is anticipated that mid-sized corporates with multiple bank relationships across UK and Europe will increasingly opt to leverage open API offerings coming onto the market for 2018.
A catalyst for innovation
Open Banking is just the starting point for further important changes which will drive new efficiencies in payments. Close on the heels of Open APIs, the UK payments market will soon launch new instruments to make payments even more efficient. For example, Request to Pay, effectively an e-invoice, will make cash management easier by giving users greater control and flexibility over payments, while Enhanced Data will enable detailed remittance advice information to travel inside the payment message, making reconciliation simpler and faster. These innovations will find their way into other countries, bringing considerable benefits in terms of efficiency and automation.
There has truly never been such an intense period of change in payments as the transformation which we are enjoying today and over the next few years. Innovation with the latest technology and payment instruments, underpinned by increasing adoption of immediate payments globally, will open up new opportunities for businesses to streamline their international payments and cash management requirements. Cloud-based Aggregator Service Providers are well placed to help customers to transition to these new solutions, while continuing to leverage existing systems, and ensure maximum efficiency and security.
Marcus Hughes, Director of Business Development for Bottomline Technologies, is a senior transaction banker with a successful history of product innovation, thought leadership and business development in a major European bank, a UK clearing bank and prominent technology firms.