How Will Open Banking Change Payments at Financial Institutions?

No area in financial services has arguably changed as drastically in recent years as the payments space. PayPal separated from eBay and, thanks in part to its acquisition of Venmo, reached a valuation of more than $300 billion, Stripe surpassed a valuation of $100 billion, Zelle usage exceeded 392 million transactions in 2021 Q1, and neo-banks such as Chime saw dramatic increases in total users — especially in the wake of a worldwide pandemic that made physical payments even less popular than they had already become.

But all of that is just the beginning of what’s changing within the payments space, given the rise of open banking.

Open banking enables financial services companies to connect to financial accounts via application programming interfaces (APIs) and quickly validate and authenticate data from a checking account. To get more specific, companies that implement open banking can use APIs to:

1. Validate account numbers
2. Validate account ownership
3. Validate account balances

Once each of these items are validated, payments can safely and securely transfer within seconds, as opposed to the 1-3 days that are generally standard in the United States via ACH transactions. 

The uses for open banking and open finance are wide ranging. Take a landlord, for example, who wants to automate the payment process without pulling money from an account that doesn’t have sufficient funds. With open banking and direct APIs, landlords will be able to validate that an account has sufficient funds before the payment goes through — and the funds will be available within seconds instead of taking days. The same advantages are present for subscription-based products and even in-store payments.

Other countries around the world have already started to roll out payments using open banking. For instance, as the author Dave Birch recently highlighted, this option now appears on GOV.UK — a website that provides information and links for citizens in the United Kingdom.  

What does all of this mean for banks? More than anything, it means that banks need to evolve.

Consider what happened when new entrants to the investing space offered a simpler app experience and no trading fees. Within just a few years, traditional players like TD Ameritrade and Charles Schwab cut their trading fees to compete. Why? Because they could see that keeping the relationship with their customers alive was worth more to them over the long term.

Fortunately, open banking provides a "potential goldmine for revenue opportunities," but still, banks should consider the same end game when it comes to open banking: Keep the relationship alive. If customers decide that they’re better off using open banking for payments — perhaps because merchants start offering a discount for using such payments — these customers will go where they can use open banking. If this happens, these customers may leave banks and credit unions and possibly even credit card companies for whoever offers the best real-time experience. 

Once the daily relationship is gone, it will be difficult to get back. Customers will sign in to the app that best uses open banking to do their daily spending, and that company that offers that portal will be in the best position to offer new products and services, from loans to savings accounts.

As this shift happens, it will become clearer than ever that those companies (including banks and credit unions) that keep the daily relationship alive will be best suited for winning the future of banking.

To learn more, read the Ultimate Guide to Open Banking.