As one might know, Open Banking is an initiative that was born out of the necessity of creating a standardized framework to help digitalize the financial sector within Europe with the idea that this would scope beyond Europe and create a movement for a faster, cheaper and more secure way to transact and bank around the world.
From then, PSD2 and UK (United Kingdom) Open Banking were born, but that is not for the scope of this article. In this article, we want to explore the benefit that the idea of Open Banking intends to bring at a holistic level.
To do so, one needs to first look at the evolution of the banking system, mainly how transactions were working before the introduction of Open Banking between shops, customers, and banks.
The classic interaction requires the usage of an interim system such as a third-party channel that is authorized to work on the customer’s behalf when treating payments. This, in time, because of what was known as the cards circuit system, like Visa, MasterCard, American Express, etc.
Why do we need Open Banking?
These created a dependency for ease to pay and are not free, with fees ranging from 2.9% to 3.5% for each payment. As times changed, other systems such as PayPal, Amazon, Apple Pay, and Google Pay systems were introduced. At first, they would piggyback on the card systems but later evolved into becoming their own systems and allowing a customer to register their bank account details directly.
Furthermore, to minimize the costs of transactions, some countries introduced national schemes, such as the EC circuit in Germany. Payment delegation systems such as Switch, Payconiq, and others came to play at a private level. Some are cheaper than others, some more secure than others.
The main issue with these new initiatives is lack of standardization, which means that for one of these systems to be adopted, there must be a talk between each bank and the provider to see if the system is strong enough, if the company is trustworthy enough, if the bank has the possibility to integrate easily with it, etc.
The second hurdle that is by no means trivial is that the payment system needs to do so with all the relevant bodies, and this can take a lot of time and effort as well as a lot of discussions and adaptations. Open Banking seeks to remove such hurdles or at least minimize them.
Benefits of Open Banking
Firstly, Open Banking is a standard that gives guidelines and is not set in stone. So, it is flexible and can be adapted easily to an area’s needs.
Secondly, Open Banking is adopted at a national level, where the National Banking Agency of that country or set of countries decides to adopt/enforce at a holistic level: all banks and financial institutions will require to adhere to such standards to be Open Banking compliant.
Thirdly, a governing body that dictates the standards for allowing third parties to be recognized as trusted should be established. And for that, there are also guidelines. The main one is that the TPP is registered with the National Banking Agency of the country and that they apply for an eIDAS certificate which a Qualified Certificate Authority signs.
So, in essence, adopting an open and verified standard at a national or regional level reduces costs for the industry, facilitates the economy, increases security, eliminates monopoly in the middleman, and allows for a better customer experience.