By Patti Murphy
The open banking market, while nascent, is growing at a rapid clip. Allied Market Research reported the global market is charting a combined annual growth rate of 24.4 percent and is expected to reach $43.15 billion by 2026.
To put this into perspective, Grandview Research estimated the global ATM market is expanding at a 10.1 percent CAGR and will reach $24.9 billion in 2022. This may not be an apples-to-apples comparison, but if money spent is an indicator, the comparison illustrates the value financial institutions and financial technology firms place on supporting the migration to open banking.
Open banking can mean different things to different people in different countries. "The focus in the EU and the UK is really more around consumers because of regulation there and [the need to support] consumers owning their own data," said Joe Spatarella, chief client success officer at Prolific Banking Inc., which develops open banking solutions focused on commercial banking applications. "In the U.S. it's going to be a very different thing." Lee Wetherington, senior director of strategy and Jack Henry & Associates, said the "major difference is that our flavor of open banking in the U.S. is market driven so far.
Chris Van Der Stad, senior vice president at Fiserv, added, "It's a conceptual framework to ensure consumers and businesses get direct access to [consumers' financial] data. Payments is encompassed in that. Payments will get more efficient and richer." He additionally noted that consumer-permissioned real-time access to data provided through open banking also will enhance fraud detection and prevention.
At the heart of open banking are application programming interfaces (APIs), specifically open APIs, which are publicly available and govern how applications communicate with each other. "Open banking offers expanded capabilities for customers through APIs [that link] between financial institutions and [nonbank] financial services providers," said Jack Baldwin, CEO at BHMI.
The practical implications are potentially enormous. A recent survey by the German open banking company Mambu found that globally 54 percent of consumers use between one and three finance apps, while nearly 20 percent are using five or more.
When consumers use one of these (such as the personal financial management app Mint), they share login information for their various financial accounts with the app which then collects transaction data by logging into digital customer account portals, a process known as screen scraping. But because screen scraping occurs without coordination with the involved financial institutions, it can be fraught with problems. Service providers often have to fix connectivity issues resulting from web portal updates and downtime, and the data isn't always up-to-date. "APIs are much preferable to screen scraping," Wetherington said.
JHA has built a software development kit, the Banno Digital Toolkit, that integrates with Finicity, an open banking company owned by Mastercard that enables community financial institution customers using the company's Banno Digital Platform to deliver a "holistic financial experience" to consumers through secure API access to third parties. More than 400 community banks and credit unions are on the Banno platform, and 20 to 30 are being added to the platform every month, according to Wetherington.
"We can now tie our financial institutions' reliability and security to the open banking ecosystem in ways that put the accountholder in the driver's seat," Wetherington said, adding that this will foster competition not just with fintechs, but also with large national banks.
Wetherington pointed to a partnership between Citibank and Google that allows consumers to open digital checking and savings accounts via Google Pay. Citi also has partnered with the ecommerce payment processing platform Stripe to support business banking services for Stripe merchants. "Helping community banks to become the center of the [customer] relationship is the endgame," he said.
Steve Smith, head of global open banking at Mastercard, stated, "At its core, open banking is a philosophy centered on empowering consumers – as a result, it elevates the position of the financial institution providing the access."
In 2020, Mastercard purchased Finicity for $825 million to advance its open banking strategy. Finicity is a founding member of the Financial Data Exchange, a nonprofit dedicated to unifying the financial services industry around common, interoperable and royalty-free standards for securely accessing consumer-permissioned financial data. FDX counts 186 active members worldwide, including JHA, Fiserv, The Clearing House, Visa, Intuit, PayPal and Plaid.
Visa attempted to make a similar play through a planned $5.3 billion acquisition of Plaid, which has built a competing open banking platform favored by mobile payment service providers, like Square Cash and Venmo. But Visa's plan was scuttled by the Department of Justice, which challenged the acquisition on grounds that Visa's real intention was to stop Plaid from building a debit network that would challenge Visa' business.
Baldwin said the card brands see the writing on the wall: open banking could drain volumes from their networks by facilitating alternatives, like buy-now pay-later, through fast credit checking and funding options. "This is certainly impacting card issuers," he said. "But it's impacting the card networks, too," as retailers seek alternatives to driving sales without driving up interchange costs.
"Embedding payments is the most prevalent use case for open banking today," Wetherington said. He cited an analysis by Simon Torrance Analysis and Bain Capital Ventures, which projected that 40 percent of payments could move to an embedded finance model by 2030.
The trend is already apparent in Europe. London-based GoCardless, for example, just introduced Instant Bank Pay, describing it as a "first step" in its "open banking strategy." GoCardless, with about 60,000 merchants, claims it can slash by 56 percent payment acceptance costs for recurring and one-off payments using bank debit schemes, like ACH debit. But speed of authorization has always been a drawback, noted Hiroko Takeuchi, the company's co-founder. Open banking resolves this shortcoming by supporting instant confirmation of authorization for one-off payments, like topping up an account outside a customer's regular payment schedule.
"By enabling businesses to take any kind of payment through GoCardless, we can challenge the dominance of cards and move beyond collecting subscriptions, invoices and installments," Takeuchi said. "The launch of this open banking feature means we can now serve any merchant, regardless of whether they have an ongoing or one-off relationship with their customers."
Volt, also based in London, offers an open payments platform that's helping European merchants bypass the card networks with real-time account-to-account payments. Tom Greenwood, the company's CEO, penned an article, published by the fintech news site Finextra in March 2021, that discussed how open banking offers merchants a chance "to push back" against rising card interchange. And he suggested account-based instant payments mechanisms could eventually displace card-based payment schemes, particularly for ecommerce.
"Where historically we have relied on Visa and Mastercard as the backbone for global ecommerce, the future is different," Greenwood wrote. "The new spine is instant, global, interoperable and account-to-account."
Wetherington said JHA's partnership with Finicity will provide the technology muscle community financial institutions need to compete with fintechs that might otherwise siphon off banks' payment activities and revenues.
In a June 2019 report, Aite Group encouraged financial institutions to move to open APIs as a way to monetize their customer data and services. It offered the example of partnering with fintechs to use a bank's payments API to offer payment services to merchants. "Banks can charge developers directly for the API calls, agree on revenue share arrangements, or agree on other models for revenue generation," the report suggested.
Fiserv, owner of leading acquirer First Data and a major provider of core processing services to banks and credit unions, is investing heavily in supporting open banking across all of its core solutions, according to Van Der Stad. "We're working with multiple solution providers and providing a single open API to enable integration," he said.
The company's DNA platform, for example, is designed around an open architecture and features real-time processing capabilities, a robust digital ecosystem and the ability to easily integrate to third-party applications. "It enables financial institutions to be more relevant to current customers and attract new customers," Van Der Stad said. He added that over 500 financial institutions across North America use DNA, and that number continues to grow.
In March the company announced Citizens Bank & Trust, an Alabama-based community bank, had signed on as a DNA. "Previously, customers had to navigate between multiple sites and apps to access their accounts, none of which consistently display the most current transaction information," said Sam Pate, CIO at the $700 million asset bank. "With DNA we'll be able to integrate whatever tech our strategy demands and operate in a real-time environment with consistently up-to-date account and transaction data."
Fiserv's open banking strategy doesn't stop with DNA. "This is a Fiserv-wide initiative," Van Der Stad said. Asked specifically how First Data fits in, he said the company is working on "a common set of APIs to front-end that solution as well."
For its part, Visa wrote in a recent white paper that acquirers "have an opportunity to broaden their role into 'payment initiation' type services. As well as competing against these new players, they will have significant potential to collaborate with them." 
Patti Murphy is senior editor at the Green Sheet and co-host of the Merchant Sales Podcast. Follow her on Twitter @GS_PayMaven.
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