Friday HighlightJan 13 2023

Europe must lead the way in open banking

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Europe must lead the way in open banking
Photo: Cup of Couple/Pexels

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.

Only about 10 per cent of all transfers are made via SEPA Instant, with most account-to-account payments taking between two and three days to arrive.

In addition, many banks continue to charge users for instant payments rather than the merchants (as is the case with cards), which discourages use. In some countries, like Ireland, instant payments are almost non-existent.

This is also an area where banks can make open banking a success.

As the ones responsible for the settlement layer, they are uniquely placed to enable real-time payments across the EU.

Many banks have not yet seen the value of real-time payments for their own customers, which is partly why the EU is moving to make them mandatory through legislation. Open banking will unlock this value.

Once the baseline of open banking and instant settlement is in place, banks will be able to build value-added services on top of it.

Dynamic (or variable) recurring payments are an obvious example where cooperation between open banking providers and banks can create a trusted product that is in high demand among both consumers and merchants.

The bank revenue opportunities from premium open banking services could also be considerable, and will become even clearer once the European Payments Council finalises its premium API scheme this year.

It should convince even the more sceptical banks that open banking is a commercial opportunity.

Overall, open banking is estimated to be worth more than $110bn (£90bn) by 2026, and banks are well placed to capture a good part of that.

This includes direct revenue coming from higher adoption by businesses, and thus higher payment volumes to business accounts, and from selling premium API services.

It also includes savings coming from upgrading back-end infrastructure to support new open banking technology.

This modernisation will make banks more efficient and profitable as a whole, and in some cases allow them to better compete with  fintechs and challenger banks.

The benefits will go beyond open banking and help banks boost customer satisfaction, make the banks more agile and ultimately more successful in a digital economy. Not to mention that the real threat to banks in the long run are Big Tech platforms, which are already growing their financial services offerings.

Banks cannot overlook the opportunity to differentiate themselves and compete against them.

‘Pay by bank’ continues to grow quickly around the world, like in the US and South America.