The EU has made no secret of the fact that it wants a European payment solution as an alternative to the US-based Visa and Mastercard.
Open banking can be that digitally-native alternative, the foundation for real-time cross-border payments in Europe.
But, to truly compete with cards, open banking needs banks to recognise it as a key driver of revenue, innovation, and customer satisfaction.
Five years ago today, the EU created a framework for open banking. Through the revised Payment Services Directive (or PSD2), newly regulated fintechs were encouraged to inject innovation and competition into banking and payments.
Today, there are around 500 regulated open banking providers and millions of Europeans that have used their services.
This growth is significant, but uneven. People in Italy, for example, still have vastly different options and experiences using open banking compared with people in Sweden.
One reason could be the lack of investment in the application programming interface (API) infrastructure that open banking needs. Another reason could be the underlying payment infrastructure available in those countries.
After five years of PSD2, we can look back to understand what worked, what did not work, and how to move forward.
The payment journey
An open banking payment can be broken down into two parts. The first part is initiation. This is everything an open banking provider does to integrate a bank transfer payment option into a merchant’s checkout so that it appears as an option for the user when they press 'pay'.
This ranges from connecting to hundreds of banks via APIs, submitting payment instructions and managing the start of the consumer payment journey.
This is the part where fintechs have a lot of control, and where a great deal of innovation has happened. But this part is also dependent on well-performing banks' APIs and frictionless user journeys enabled by the bank.
Where these are not available, open banking cannot flourish.
Banks should recognise that APIs are a new channel for providing services to their customers, and treat them as a product – just as they treat their online banking app.
The second part is settlement – the actual moving of money between accounts.
After a payment is initiated through an open banking provider, the settlement is done by the bank. And that is where Europe is lagging behind by not having instant payments as the default payments infrastructure.
When combined with real-time settlement, open banking allows merchants to get their funds instantly. This gives them the certainty that they can ship goods and it helps with their cash flow.
Banks’ relationships with merchants and small-to-medium enterprises can be improved through enabling these new, more efficient open banking payments.
SEPA Instant, the EU’s voluntary scheme for euro transfers, is available to a little more than half of Europeans today – although this varies between countries.