By Nick Raper, Director at Nuapay UK 

Open Banking is a buzzword used almost as often as ‘challenger banks’ or ‘bitcoin’. And much like the rise of cryptocurrencies, few consumers truly understand the full scope of what Open Banking offers. Arguably, though, that’s not a concern if the services and benefits of using Open Banking are made readily available to end-users.

And that is exactly what we’ve been seeing in the UK of late. Catalysed by a global COVID pandemic, merchants and consumers are hastily embracing new digitally focused Open Banking services and ways to pay.  Adoption of real-time, account-to-account payments has been rising at a rapid pace, with merchants and consumers alike benefitting from a world of Open Banking powered frictionless, low-cost, instant, and secure payments.

This is not just for online commerce either - Open Banking payments have made their way into a range of solutions, including “Pay at Table” mobile ordering, QR based solutions for POS, and request-to-pay or pay-by-link invoicing solutions which have accelerated rapidly in an increasingly remote-based world. And while COVID 19 may have started the trend, many of these habits are likely to remain as permanent shifts in behaviour.

The UK is not the only market seeing growth in Open Banking. Tremendous strides have been made across the globe in terms of realising Open Banking capabilities and implementing services, with the UK, Europe, and parts of Asia and Latin America making real progress led by governments, regulators and industry.

And while Open Banking is firmly accelerating, key to the success of Open Banking as a truly competitive and global payments network is the adoption of real-time, account-to-account (or ACH) infrastructure to power the underlying payments the world over.

Leading with infrastructure

 Of course, the markets that already have the necessary infrastructure in place have made the most progress. Most experts would agree that India leads the way in terms of real-time payments infrastructure. In 2016, its government introduced Unified Payments Interface (UPI) to facilitate Open Banking-based payments. Today, widespread adoption continues to increase at a rapid pace. According to ACI, the country’s immediate payments scheme will exceed 50 billion transactions per year by 2024. Adoption in this market is led by household brands such as PayTM, Flipkart, Uber, and GooglePay.

In Europe, the Second Payments Services Derivative (PSD2) was implemented to increase access to safer, and more accessible banking and payments. Following this, the UK’s Competition and Markets Authority (CMA) implemented Open Banking, aligned with the PSD2 regulation, to expedite the UK’s Open Banking capabilities and increase competition in the consumer finance market. Now, considerable market focus is on the fintechs, such as Nuapay, Truelayer, and Trustly, facilitating real-time payments and the potential value to merchants and customers alike from these solutions. Indeed, the Open Banking Implementation Entity, created by the CMA to develop API standards and industry guidelines, announced that in February 2021, for the first time in a calendar month, more than 1 million Open Banking payments were processed in the UK. This is huge considering that around 300,000 Open Banking payments occurred in the whole of 2019, rising to only 3.2 million in 2020.

It’s also worth noting the progress and innovation made in both Mexico and Brazil. Mexico took the lead in Latin America by releasing its Fintech Law, which addresses the framework for the sector, in 2018. Following this, a report was created by C Minds, the Open Data Institute, and the National Banking and Values Commission, offering recommendations on establishing the next steps for the country’s Open Banking initiative.  Brazil followed closely behind, with its Central Bank hosting a public consultation on Open Banking in 2019. The country has since realised its Open Banking law and agreed an implementation timeline in collaboration with the National Monetary Council. Both markets have made tremendous progress in a few short years.

These are just a few of the nations worthy of acknowledgement. Of course, there is also China, which has seen QR code adoption grow exponentially, Bahrain, where Tarabut Gateway is making significant strides, and Singapore where the Monetary Authority of Singapore (MAS) has driven innovation with a comprehensive, non-mandatory governance framework. Local banks like DBS and OCBC are some of the global leaders in Open Banking, and their customers can now access banking services and payments through a variety of platforms and marketplaces.

Next, it is expected that there will be increased attention focusing on the US Open Banking market.

The challenges at bay

The US Open Banking market is unlike any other.  As the biggest financial services market in the world, it has the most to gain from innovation and new solutions.  Yet it presents a complex regulatory environment with varying government agencies and state-level involvement, and a general aversion to strong regulation.  This regulation, or lack thereof, has created little pressure or incentives to encourage the banks to embrace open APIs. Despite this, the US has made great progress in developing its Open Banking offerings, and the US is host to some of the market leaders in Open Banking such as Plaid, Finicity, and MX.

Yet, with little to no real-time payments infrastructure or regulatory oversight, Open Banking-based payments have not yet emerged as a truly competitive alternative to today’s payment methods. This is despite significant demand in the market for alternatives, as merchants and payment providers look to avoid the particularly high costs of existing solutions in the US.

One such cost is interchange fees, which are set by Visa and Mastercard, and charged to merchants every time a customer uses a credit or debit card to make a purchase. Already high, a further increase in Visa and Mastercard credit card fees is also expected to take effect next year, although the Justice Department is currently investigating whether Visa is engaging in anticompetitive practices toward merchants.

Another obstacle is chargeback fees, which for merchants in the US don’t just mean a lost sale, but also paying the significant fees associated with processing chargebacks. While the same is true around the world, in the US, these costs continue to increase and are yet to be addressed by regulators. Chargeback fees can range from anywhere between $20 to $100, but once you add operation and customer acquisition costs, merchants stand to lose two to three times the transaction amount.

With Open Banking, processing fees of any kind are significantly lower, as payments avoid card networks altogether. In addition, payments are authenticated directly between consumers and their banks, meaning merchants can avoid any chargebacks generated due to fraud or an inability to capture funds, and the consumer never needs to hand over their banking details or passwords – resulting in further security benefits.

The argument for Open Banking payments in this market is clear. With this in mind, you can begin to understand why developers and entrepreneurs state-side have been waiting on real-time payments infrastructure.

Change is coming

And change is coming. Though the US market introduced real-time payments infrastructure much later than other technologically similar markets, it’s set to see significant uptake soon, with two schemes now live and a third underway. The Clearing House and Zelle are the two schemes enabling fund transfers and real-time payments that are already in place. The third network, FedNow, comes from the Federal Reserve, and will enable real-time payments for banks of all sizes. To date, these payment schemes have seen only a small portion of total transactions, but ACI is forecasting this to grow at more than 42% per annum over the next 5 years.

Although significant Open Banking adoption has already been seen within banks, the turn-on and acceleration of real-time or instant payment such as FedNow will see another round of product investment and maturity to develop more merchant focused solutions. Once the market has merchant buy-in, consumer awareness will increase, helping to make the benefits more tangible, leading almost certainly to growth in demand. The US would do well to look to the UK, Europe and India on this front. Equally, we will likely see increased interest from international players entering the US to take advantage of the growing market - ourselves included. EML Payments recently agreed to acquire Nuapay and intends to expand the Open Banking platform to North America.

A global network is in sight

Throughout the markets where real-time and account-to-account payments infrastructure has been prioritised, significant progress is being made both in terms of the technology’s adoption and education on its benefits. As we begin to see similar developments made in the US, the prospect of a global, real-time payments landscape becomes significantly more tangible.

It won’t be picture perfect immediately, and there will be kinks to iron out along the way, but the benefits for all providers in the ecosystem are strong to provide a more competitive, fast, and secure payment alternative for merchants and consumers.