Tim Waller, Head of Legal & Policy, Token, looks at the current Open Banking landscape and tells us what must be improved
As Open Banking payments move to the mainstream, the Open Banking industry must come together to increase awareness of the problems they can solve in the post-pandemic world.
While we’re deeper into this process in the UK, I see encouraging signs in Europe as well, with regulators pushing hard to drive forward the roadmap to greater adoption.
Suppose EU industry bodies, banks, and third-party providers (TPPs) work hand-in-hand with the regulators. If that’s the case, we’ll see more innovative products and services powered by Open Banking account-to-account (A2A) payments, and consumers’ familiarity and confidence will increase.
Looking at the current international Open Banking ecosystem, I see three key developments shaping a greater degree of success moving forward.
National competent authorities should help dismantle obstacles to access
One of the main obstacles to wider Open Banking adoption is Europe’s fragmented API landscape, which has created problems in API connectivity, consistency, and the predictability of payments.
It was therefore encouraging to see the European Banking Authority (EBA) step in earlier this year to tell European Union (EU) national competent authorities (NCAs) to get more involved where account servicing payment service providers (ASPSPs) have maintained obstacles to account access.
These obstacles typically include bloated user journeys over multiple screens (and delays in loading those screens), unnecessarily cumbersome authentication processes, and inconsistent or unfamiliar branding and terminology.
The EBA has now proposed that NCAs assess ASPSPs’ progress in removing obstacles in their respective jurisdictions and impose supervisory measures — and even fines — to ensure closer compliance with payment services regulations.
I support this tougher approach. It’s a good place for NCAs to get more involved. The removal of obstacles will increase the adoption of Open Banking solutions, increase conversions, and ensure that payment initiation becomes a true alternative to many established payment technologies.
The EBA expected NCAs to take action by 30 April 2021. Whilst I’ve heard anecdotally about enforcement action by the German regulator BaFin against a German ASPSP, such action hasn’t been widely reported. Sadly, there’s not yet been a noticeable reduction in API connectivity obstacles in many EU member states.
The difficulty faced by EU NCAs is that their actions haven’t been backed up by their local competition authorities, as was the case in the UK. NCAs cannot remove obstacles single-handedly. The coordinated approach across regulators, government, and enforcement authorities in the UK is one of the reasons why Open Banking is advancing rapidly there. Moving forward, I see this as an approach that Europe should mirror.
TPPs could give consumers greater confidence
Many consumers have now experienced how easy an Open Banking-enabled A2A payment is to initiate. But this upside has a potential downside: the swift user journey and ease of use may lead some to question the strength of their security. In this context, TPPs must actively educate consumers on A2A payments’ fundamental security benefits.
TPPs have the power to shape positive consumer perceptions that, for example, will boost confidence and adoption. I’ve encountered some forward-looking TPPs that are investing heavily in support teams, even when customer support isn’t within the scope of the services they provide. Others are investing in more flexible solutions to put consumers in the driving seat, such as refund transactions.
This is a good start, but it needs to become more widespread. Consumer protection is an area where further education is required, and TPPs must take the reins.
Open Banking payments don’t offer the same purchase protections as credit cards, and nor should they, as this would dramatically increase their cost. However, it’s important to emphasise that Open Banking is not without consumer protection. Under PSD2, for example, payment initiation service providers (PISPs) and the payer’s bank each have clear obligations should the payment encounter problems in execution. TPPs only stand to benefit from actively educating consumers on this point.
Relationships could develop more reciprocally
The Competition and Markets Authority’s (CMA’s) decision to mandate Variable Recurring Payments (VRPs) as the mechanism for sweeping (the automatic transfer of money between a customer’s accounts) is very welcome news.
While other methodologies that the CMA could have mandated have much to offer, none would have provided the speed, customer experience, and security that VRPs can offer.
In tandem with VRPs and other industry advancements, banks’ perceptions of Open Banking are changing. Once seen as a chore, it’s now perceived to be an exciting opportunity. Open Banking has previously sat slightly lost somewhere between Digital Innovation teams and Compliance in banks. However, if there’s a long-term financial incentive — such as charging TPPs for Premium APIs — this could kickstart an API marketplace.
The challenge here is getting sufficient momentum amongst banks to offer TPPs Premium APIs. Without this momentum (and dare I say, its standardisation) TPPs will not be able to provide a clear offering to their customers, such as payment processors or large merchants.
One exemplar to follow is the Financial Data Exchange (FDX) in the US, formed by 55 financial institutions and dedicated to developing a common standard for the secure access of financial data.
Whilst there’s nothing particularly special about this in isolation, working in tandem with The Clearing House, the FDX has developed model contracts that serve as the basis of relationships between TPPs and financial institutions. This should serve as an inspiration, and starting point, for their peers in the UK and Europe.
When you consider the three developments covered in this article, each stakeholder — whether TPP, bank, regulator, government, or other — is a cog in the wider Open Banking machine. By forming closer, and more reciprocal, relationships, these cogs can deliver a brave new world of payments for the world’s consumers.
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