Open Banking and Real-Time Payments Are Changing Banks for the Better

Banks continue to flex their muscles and engage in fintech innovation, opening themselves up in a way previously never thought possible. They were once staunchly resistant to outside intervention, but a recent report from ACI Worldwide and Ovum has revealed that this trend is changing. Almost 90 percent of banks are forging a path toward open banking and real-time initiatives.

What is Open Banking?

The term “open banking” may sound a little scary at first. But open banking doesn’t mean that your financial statements will be on the web for anyone to review. What it does mean for you as a financial services customer is that your bank will become (or already is) part of a network of financial institutions.

This network shares data securely through APIs so that users can interact with other financial institutions. They can transfer funds more easily, compare product offerings, and tailor their banking experience to better suit their needs.

Open banking relies on networks, rather than centralization (sound familiar?). This allows customers to free themselves from the shackles of antiquated financial institutions that fail to act in their interests.

Sandeep Todi, the co-founder and CMO of Remitr, explains, “Open banking will accelerate the pace of innovation and [give] access to new services. This is achieved while retaining the dependability of banks and the security of money they provide, along with the agility of new service providers who are free to innovate in pockets and in specific niche areas.”

According to the ACI Worldwide and Ovum survey, more than 70 percent of banks are now willing to open up their APIs to third-party developers. European banks are leading the charge, with those in Asia and the Americas slightly behind.

Democratizing Access to Banks

Jeff Zhou, the co-founder and CEO of Fig Loans, says, “Open banking initiatives democratize access to bank capabilities. This opens a floodgate for fintech innovation because we get direct access to core bank infrastructure. As a financial services provider, Fig is often at the mercy of bank capabilities. For instance, one of our past banks could not change single entries in a file; they had to delete the entire file. The process to change an entry was to call the bank; they would call a back-office department to cancel the entire file (with no written confirmation on our end), and then we would upload an entirely new file, praying the original was actually canceled.

“Imagine being in the grocery store checkout line, needing to swap an item, and being told you first have to speak to the manager, who dumps your cart out, and then says you can now refill it from scratch. From a bank’s perspective, open banking initiatives will be revolutionary because [they turn] banks into platform providers, allowing them to capture new revenue streams from the innovative fintech products built on their platform[s].”

APIs on the Rise

APIs have been removing integration problems and allowing for collaboration between multiple parties for some time now. And they’re finding their place in modernizing the traditional banking system. This will allow banks which embrace the change to do business with greater agility and offer their customers greater choice by turning their competitors into partners.

Up until recently, banks have built and controlled their own applications for customers, from online banking to cross-border payments. But by using APIs, third-party developers can gain access and build better, more customer-centric applications, offering the innovation and insights that traditional banks may lack.

Real-Time Payments

The report also highlighted an increase in real-time payments, doubling from just 31 percent of payments in 2017 to 62 percent this year. Customers prefer real-time payments and are starting to expect them, with European banks blazing the trail in this direction. As fintech companies continue to push boundaries, offering better, faster, and bolder options, banks will have to make some changes if they want to stay relevant.

Zhou continues, “Real-time payments radically improve our customers’ ability to manage their cash flow and account balances. Today, there is a delay (sometimes up to 3 business days) between making a payment and when it shows up in your account balance. This means customers managing tight budgets jump through a series of mental hoops to reconcile all the places they’ve spent money and if those [payments] are reflected yet in their balance. The result is a significantly tougher time avoiding expensive overdraft and returned payment fees.”

Todi adds, “Real-time payments is fundamental to the always-on economy. If you take a step back and imagine a small manufacturing business raising an invoice on Thursday and getting paid on the same day, they suddenly have the extra liquidity to make wage payments on Friday. That means less working capital requirement, [lower] cost of business, and happier employees. Somewhere down the line, it translates into either more profit (which is good) or cost reductions passed on to customers. Real-time banking thus goes [far] beyond the immediate promise of faster payments. It increases the velocity of money, increases consumption, and directly reduces the cost of household expenses.”

It’s a win for customers, a win for banks, and a win for innovative third-party developers.

Arjun Jayaram, CEO of payments tech startup Baton Systems, comments, “The amount of operational and capital inefficiencies that these institutions are already facing, combined with the increase in global regulatory scrutiny and desire for transparency, should make this a priority. There is a lot of potential in distributed ledger technology applications, and with the amount of testing that is being conducted throughout North America, Europe, and Asia, it’s safe to assume that the current banking landscape for payments is on the verge of a major tipping point.”

The Takeaway

The study confirms a trend that we’re already seeing. But while banks initially trembled at the onslaught of fintech innovators, opening themselves up and allowing for real-time payments is a win-win-win for all. However, as always, those who are slow to adopt APIs and prepare for innovation will be pushed aside by consumers.

Open banking and real-time payments are transforming the competitive landscape. Banks can look forward to potential new revenue streams, while consumers can enjoy improved services, wider choice, lower costs, and the freedom that decentralization brings.