The progress of Open Banking and road ahead

According to McKinsey, among the positive signs noted by banks for 2021, apart from an overall opportunity to accelerate growth in digital payments, is the use of real-time payments infrastructure to offer fully digitised customer experiences. This will  improve the flexibility and the cost of their operating models through the usage of APIs and by offering payments-as-a-service (PaaS) that enable  industry utilities to build scale etc.

Many banks choose to partner with technology providers to expand quickly and modernise their product portfolio and offerings to meet customer expectations in banking, lending, payments, and money management.

What are the opportunities ahead for Open Banking, which are the key drivers of Open Banking acceleration this year, and what might  get in the way?

Ed Adshead-Grant: Open Banking has become a global movement in financial services, primarily in response to the demand for everything to be digital across the world in our everyday lives. The ability for real-time ‘read’ and ‘write’ of customer data through permissioned third parties introduces a sharp innovation curve for authorised fintechs and banks to improve any customer journey. Businesses and consumers are universally looking for more convenience and personalised data as they conduct their day-to-day business. The UK leads the way in Europe, where the regulators enforced adoption with standardised API technology and rule books. For instance, in January 2021, the UK government announced its full endorsement and eventual introduction of Open Banking as a new way of paying and collecting money across all government departments. What is essential now is that we maintain this innovation momentum, with adherence to keeping standardisation and adoption – it will be difficult to build new services if new API capabilities are adopted in a patchy fashion by ASPSPs.

Stefano Vaccino: Europeans want easier, more seamless and intuitive value-added banking experiences. This is driving increased adoption; even where regulation doesn’t explicitly require it. Fintechs should capitalise on the ever-changing landscape and launch new financial services that speak to the digitally-savvy consumer and help transform businesses. We’ve seen this first-hand. Several Yapily clients launched Open Banking-powered payments and investment products to meet this growing consumer demand in Germany and France last year.

BUX Zero, for example, uses Yapily’s Open Banking infrastructure to connect to bank accounts in Germany, Austria and France. This enables Bux to take a pan-European approach to customers seamlessly funding their accounts and building an investment portfolio in seconds.

Fragmentation is a challenge for adoption: there are more than 6,000 banks across Europe who all have different ways of communicating. So, as a business, when you have customers banking with many different financial institutions, it’s down to the technical service provider to understand the nuances to ensure absolute quality and reliability in pan-European connectivity. With over 3 million users now actively engaged with Open Banking solutions, we expect adoption to accelerate across the continent.

The real opportunity for Open Banking lies in creating better financial services for all that is based on financial inclusion. The pandemic highlighted the necessity for access to payment and financial data to improve financial wellbeing and save businesses. Indeed, half of the UK’s small businesses moved to use Open Banking (OBIE data) in 2020. Open Banking provided them with the cash flow forecasting and cloud-based accounting required to keep their businesses going during lockdowns.

Is 2021 the year Open Banking-based payment products come to market, kick-starting a major challenge to the dominance of cards? Is the technology mature enough for payment initiation service providers (PISPs) to create meaningful propositions? 

Ed Adshead-Grant: The switch in focus from read-only (AISP) propositions to committed ‘write’ (PISP) activity, like Open Banking payments, is the next natural stage. Technology and regulatory support are already in place. The ‘secret sauce’ is now education and awareness of applying it to improve operations and customer options. No-one buys ‘open banking’ in itself, and the industry has spent little money educating the user base on a somewhat ‘dry’ regulatory change; however, consumers do buy into faster, easier and more informed experiences on glass, and businesses are always looking to solve pain points like the cost of payments, reconciliation and cash allocation. Whilst open banking account information services have previously ‘lead the charge’, we are now seeing popular consumer-facing brands, such as Tesco, Revolut, and JustGiving, use payment initiation services to get paid - initiating nearly GBP 5 million transactions in January 2021. 

Stefano Vaccino: Absolutely. At Yapily, we are seeing a significant increase in Open Banking payment initiation (PIS) API calls, with more than 100% month-on-month growth over the last 5 months.  

Open Banking technology is certainly mature enough to rival the dominance of cards. And it offers businesses real opportunities to streamline their operational costs. Fees charged by card networks are incredibly high. Yet card payment providers have held a monopoly on the market for decades. But this is changing. Open Banking payments offer significant cost savings to merchants which they can either pass on to their customers or reinvest back into their business.  

American Express has selected Yapily to deliver its Pay with Bank Transfer product across Europe. The payments market is the main driver of adoption, but there are already payment products on the market utilising this technology to remove the friction involved in making and receiving payments. Undoubtedly, we’ll see more mainstream companies and applications utilising Open Banking in 2021 and beyond.

Yapily data published last year found that in the UK, ecommerce businesses such as Amazon, eBay or Shopify process an average of 10,000,000 transactions per month, with an average value of £67 each. With a typical card network fee rate of 1% per year, that’s GBP 80.4 million of annual fees to card networks. If merchants had processed their payments through Open Banking, it would have only cost them GBP 6,360,000 per year – saving these businesses 92%, which equates to GBP 74,040,000.

Moving from Open Banking to Open Finance and the Open Data Economy: What would Open Finance look like and what are the benefits to all parties involved? To what extent has COVID-19 accelerated this initiative?

Ed Adshead-Grant: The UK’s evolution from Open Banking which started specifically on current accounts, to Open Finance which embraces savings, loans, pensions, mortgages and more, is already underway. The FCA has reached out to the industry in support of the use of Open Data being leveraged further to include utility, telecoms and any other personal data that the user may want to permission into their window and action. This is to support their status as true innovators and would mirror Australia’s proactive journey. In short, the COVID-19 pandemic has underwritten the demand and reality of needing remote access to real-time data for as many use cases as possible.

Stefano Vaccino: The ongoing lockdowns have placed huge financial pressure on individuals and businesses. COVID-19 made it clear that SMEs need real-time insight into their financial position to forecast cashflow. And individuals need greater oversight of their finances to stay in good financial shape.

In the world of Open Finance, financial management applications will have a holistic view of an individual or business’ financial circumstances in real-time. TPPs will use aggregated data to offer advice and services and execute transactions on behalf of customers - giving their customers greater control over their finances. Ultimately creating financial inclusion for all.

In practice, this could be a personal finance dashboard that enables consumers to understand and optimise their cash flow, savings or investments. This could help a consumer know whether to put an extra GBP 100 into a savings account or pension and then execute that transaction on their behalf.

To make Open Finance a success, the industry and regulators must come together to establish a framework that will set a global benchmark. In the UK, we have the Open Banking Implementation Entity (OBIE), whose goal is to create a level playing field for ecosystem participants. Since setting up an advisory group on Open Finance, we expect the FCA to continue to drive the discussion amongst the ecosystem which will see the beginning of new partnerships.

What are the most promising Open Banking uses cases and propositions?

Ed Adshead-Grant: Open Banking’s most immediate impact has been avoiding bank card fees as traffic moves to bank account-to-account payments. This option is starting to appear on more and more checkout pages, with one organisation quoting that the 30% of card traffic left on their site still costs more than the 70% that has moved to open banking payments. There is also a strong business case for improving the reconciliation of incoming funds, where the extra real-time data delivered via an open banking payment has allowed one wealth manager to reduce their unallocated funds from 10% of funds to under 3%. In certain sectors, where dishonest card chargebacks represent a risk, for example after a service has been used, open banking payments bring a further advantage.

Stefano Vaccino: The most promising Open Banking use cases are in payment innovation, accelerating the adoption.  

American Express (Amex) uses Yapily’s infrastructure to deliver its Pay with Bank Transfer payments service across Europe. Amex will expand this service to merchants with an ecommerce presence across nine European markets and has plans to double its European coverage by the end of 2021. 

Another powerful use case for Open Banking is for lending and credit products. The economic impact of COVID-19 has caused lending applications to surge. As a lender, it’s important to balance the risk associated with increased demand for credit with fair and affordable lending. For example, an independent report from the University of Edinburgh Business School found NHS workers are heavily reliant on long-term overdrafts and high-cost credit, where APR is as high as 1,333%. This is leading to a financial crisis for NHS workers who can’t escape mountains of debt, despite working full-time on the front-line during the pandemic.

To keep up with demand, lenders need to be able to make quicker and more informed credit decisions, while assessing the true creditworthiness of their customers. Using Open Banking, businesses can retrieve transaction history and spend data that allows them to create bespoke products to suit the customer’s needs. Lenders have a responsibility to assess a person's actual financial situation to make fair and affordable lending - and Open Banking is integral to making this happen.

Financial institutions will migrate towards ISO 20022 in the years to follow. How prepared are European banks for migration and how will this context play out for banks partnering with fintechs in seeking innovation?  

Ed Adshead-Grant: The move to ISO20022 is gathering pace, and not only due to the SWIFT migration deadline of November 2022, SWIFT mandatory testing by February 2022 and the co-existence period ending in 2025. The market has accepted that ISO 20022 offers real opportunity to increase their operational efficiency, improve customer service and help support interoperability for new revenue streams. However, in Europe, the complexity of many banks’ IT infrastructure means that these deadlines can be a big challenge and partnering with fintechs to help modernise their platforms is a recognised trend. The structured formatting enables transactions to be enriched with extra contextual data and, perhaps more importantly, helps fuel the interoperability of systems across different countries, systems and networks. The extra XML data that ISO2022 brings adds more power to the flow of all transactions where, historically, any associated data with a transaction was processed separately and later reconciled. In the new world of machine learning and automated processing, this linking of data packages with the payments transaction introduces massive efficiencies and quality user insights.

Stefano Vaccino: Ultimately, ISO 20022 will help drive the number of banks partnering with fintechs such as Account Information and Payment Information Service providers. As migrating to ISO 20022 will enable a higher quality of standard data models regardless of which Open Banking protocols a bank decides to use when exposing the corresponding ISO codes for the booked transactions. Yapily is already normalising transaction codes to the corresponding ISO 20022 standard across Europe, even when the bank does not provide one. This means banks can be confident they’re receiving the benefits of ISO 20022, without necessarily having to implement it themselves - saving them time and money. 

About Ed Adshead-Grant 

With over 20 years’ experience in the payments sector, Ed is responsible for driving the strategic development and execution of the payments business segment for the EMEA line of business. Having worked at leading IT software and service companies for projects in over 30 countries, Ed has held a number of global strategy, product and client management roles with PwC, First Data Corporation, Pepper Consultants and Hewlett-Packard. Ed is passionate about helping financial institutions and corporates to better power and protect their payments and financial messaging.

About Bottomline Technologies 

Bottomline (NASDAQ: EPAY) helps make complex business payments simple, smart and secure. Corporations and banks rely on Bottomline for domestic and international payments, efficient cash management, automated workflows for payment processing and bill review, and state of the art fraud detection, behavioral analytics and regulatory compliance.

About Stefano Vaccino 

Stefano Vaccino is the Founder and CEO of Yapily, an enterprise infrastructure company. Stefano worked in Investment Banking at Goldman Sachs before moving into the technology industry. Stefano was Chief Product Officer at both Algomi and Red Deer prior to founding Yapily. With a focus on unrivalled connectivity for Open Banking, Stefano is passionate about building products and services to drive financial inclusion. Stefano studied Engineering at Politecnico di Torino (Italy), INPG (France), EPFL (Switzerland) and MIT (USA).

About Yapily 

Yapily is an enterprise connectivity platform, allowing companies to share financial data and access payment infrastructure. Designed and built for Open Finance, Yapily enables fairer and better financial products for everyone. The company has raised $18.4m in funding to date, and provides infrastructure for industry leaders including American Express, Intuit Quickbooks, Moneyfarm and BUX. Headquartered in London, UK, Yapily employs over 80 people and continues to scale rapidly.