This refers to a banking practice that gives third-party financial service providers open access to consumer banking, transactions and other financial information via application programming interfaces (APIs). The sharing of financial information has enabled customers to access user-friendly interfaces and make faster, easier and more secure payments.
It’s a modern, straightforward and highly effective approach, so it’s no surprise that open banking is so popular, particularly in light of COVID-19 which forced the industry to digitise even faster than originally expected. In the UK, for example, there are currently three million open banking users — three times more than in 2020.
One area of the finance sector that looks set to reap significant benefits from open banking is cross-border payments. Due to the various time zones, intermediaries and legal requirements involved in a transaction, sending money internationally has always been somewhat challenging. However, open banking can go some way in solving the problems financial institutions, businesses and consumers have all traditionally faced, ensuring that cross-border payment services are cheaper, faster and better for all parties involved. Stan Cole, Head of Financial Institutions at Inpay, delves into the topic.
APIs and cross-border payments
Open banking enables third-party financial services providers to access data from banks and other financial institutions, with APIs offering access to account information services (AIS) and payment initiation services (PIS), allowing apps to directly interact with bank accounts. Although APIs take a great deal of effort to design and implement, they are time-saving and cost-effective in the long term. This is because with these solutions, financial institutions don’t need to create custom solutions for every FinTech they intend to integrate with. APIs also allow new financial services to be developed more quickly around these interfaces.
So, what does this have to do with cross-border payments? Well, in our globalised world, sending money abroad is commonplace, whether that’s due to trade and e-commerce, international investments, global supply chains, or the sending of money via international remittances. And according to the Bank of England, cross-border flows are expected to grow significantly in the coming years, from $150 trillion in 2017 to an estimated $250 billion by 2027. As a result, banks, financial institutions and other global businesses must be able to facilitate these transactions with ease and efficiency if they want to attract and retain their customers. Partnering with FinTechs using APIs can play a significant role in achieving this.
The benefits of open banking for cross-border payments
Cost & speed
Open banking enables senders and recipients to bypass the intermediaries that would otherwise be involved in facilitating cross-border transactions. For instance, direct access to customers’ bank accounts means that a business or financial institution could verify their identity and creditworthiness without the help of a third party. This results in reduced fees and quicker services. Time and money can also be saved because FinTechs using open banking will provide an efficient alternative to the slow, expensive legacy systems currently in use.
Ease
Open banking can make it considerably easier to make cross-border payments. APIs can be designed to provide a streamlined, responsive user interface and thereby provide an excellent customer experience. In addition, open banking makes know-your-customer (eKYC) processes much simpler as they can be entirely digitised, gaining the required information in seconds rather than days.
Safety
As well as improving KYC processes, open banking allows banks, financial institutions and businesses to reduce the risks associated with cross-border payments. They can immediately check that customers are able to afford the transaction, for example, and set precise limits. FinTechs using APIs are also likely to have stronger cybersecurity measures in place compared to dated legacy systems.
Competition
Open banking means financial institutions and businesses can stay flexible and meet evolving customer demands, with APIs allowing them to offer exceptional customer experiences. As a result, there is increased competition, encouraging innovation and giving customers more choice over the companies and services they use.
Open banking and cross-border payments today
Open banking is already making waves in the cross-border payments sphere, with many companies already responding to the clear benefits APIs can bring. Some exciting services to have emerged include API-driven live FX pricing and API-based currency hedging automation, while many big names in the financial services sector (including Visa, Mastercard and Western Union) have teamed up with forward-thinking FinTechs in order to use open banking to improve their cross-border payment services.
The most exciting part of this is that open banking is still in its relative infancy and is continuing to evolve. With new tools regularly launching to accommodate various markets and purposes, financial institutions and businesses can take advantage of this phenomenon to provide the best possible customer experiences to anybody that needs to make a cross-border transaction. However, to do so, they must find the right FinTechs to support them as they strive to bring their financial services into the present day.
There are just six months left until Open Banking phase two begins, when customers will be able to digitally access and securely share their bank transaction data to get the most from their finances.
The initiative will encourage financial service providers to offer high quality, targeted services and in turn boost competition.
Roger Vincent, Head of Banking and Innovation at Equifax, comments: “The banking industry is set for a huge customer-centric shake-up with the implementation of Open Banking phase two in January 2018. This exciting development will dramatically change the customer banking experience, helping consumers and businesses to use their financial transaction data to access products more easily and better understand their finances.
“The initiative kicked off earlier this year with stage one, where the ‘CMA9’ (nine banks mandated by the Competition and Markets Authority) provided improved access to information such as ATM locations and product listings. The second stage is the real game changer, with bank transaction data made available digitally for consumers and businesses to share securely, and only with their agreed consent, via open application program interfaces (APIs). Through the open APIs the data can be used by authorised third parties to build new high quality and targeted services, including new digital offerings, facilitating a more competitive environment.
“The ability for transaction data to be used for automated creditworthiness and affordability assessments, fraud detection and product accessibility is endless. Customers will be able to control how their financial data is shared digitally and provide a deeper picture of the way they manage their money. This could mean a quicker, more secure and fully digital mortgage application process or faster access to finance for a new business venture. For those currently underserved by the market, for example young people or the self-employed, it could mean the start of a journey to better financial health.
“Over the next six months, banks need to embrace the move towards a more transparent banking world. To do this successfully, preparations must focus on meeting the long-term practical benefits of consumer empowered data sharing rather than approaching this change as a tick-box compliance activity.”
(Source: Equifax)
