Open Banking is much more than a technological advancement; it is a paradigm shift poised to transform the financial services industry.
Open Banking is revolutionising payments
By enabling secure data sharing through open APIs, Open Banking (OB) is fostering collaboration, driving innovation and putting consumers at the centre of financial ecosystems.
But how will this evolution reshape the payments landscape?
Understanding Open Banking
At its core, Open Banking facilitates the secure exchange of financial data between banks, fintechs and third-party providers via open application programming interfaces (APIs).
Often referred to as “API-fied finance,” this system breaks down traditional silos, enabling seamless collaboration and innovation.
Unlike legacy financial systems, OB operates within interconnected marketplaces and cloud-based infrastructures.
This shift from vertical silos to dynamic ecosystems allows services to be tailored to consumer needs while ensuring data security and accessibility.
Customers benefit from more personalised financial tools, with the power to manage their data securely and flexibly.
Open Banking vs. Credit Cards: A New Paradigm
Open Banking presents a compelling alternative to traditional credit card payments.
In the existing credit card system, transactions involve a complex four-party model dominated by intermediaries like Visa and Mastercard, with interchange fees passed on to merchants.
With OB, merchants can bypass these intermediaries by initiating payments directly from customers’ bank accounts.
Customers simply select “Pay by Bank,” authenticate via their banking app and authorise the payment, creating a streamlined process that reduces costs and friction.
While this approach has significant advantages, credit cards remain competitive due to their global acceptance, rewards programs, and access to credit.
Rather than replacing credit cards outright, OB payments are likely to coexist, gradually gaining traction in areas such as e-commerce where their cost and speed benefits are most apparent.
VRP: Open Banking’s Answer to Direct Debits
Variable recurring payments (VRPs) are one of Open Banking’s most promising innovations.
Similar to direct debits, VRPs allow customers to authorise regular payments to service providers.
However, they offer greater flexibility and control by enabling users to set transaction limits, frequency, and duration.
Unlike direct debits, VRPs do not require individual authentication for each transaction.
Instead, secure APIs handle these processes in real-time, ensuring security while reducing fraud risks.
For merchants, VRPs offer advantages such as faster payment settlement and reduced risk of chargebacks.
For consumers, they provide the ability to cancel or modify mandates at any time, delivering unparalleled control.
Though not yet available across the EU, VRPs have the potential to disrupt traditional payment models, particularly for recurring transactions like subscriptions and utility bills.
Their adoption is expected to grow as consumers and businesses recognise their benefits.
Open Banking as an Alternative to Instant Transfers
With the integration of real-time payments into Open Banking, solutions like Germany’s former Giropay or Klarna’s Sofortüberweisung may see direct competition.
OB offers similar functionality with improved security, allowing authorised third parties to access bank accounts without exposing sensitive credentials.
The upcoming Single Euro Payments Area (SEPA) regulation, requiring banks in the eurozone to facilitate real-time payments by 2025, will further accelerate this shift.
Open Banking could become the new standard for online payments in Europe, seamlessly integrating with the region’s evolving regulatory landscape.
The Game-Changing Potential of Open Banking
Open Banking represents more than incremental innovation; it is building a foundation for a radically new financial infrastructure.
By democratising access to financial data, it encourages competition, enables new business models and creates opportunities for tailored, user-centric services.
As OB matures, its impact will extend beyond payments to reshape how financial services are delivered and experienced.
For consumers and businesses alike, the promise of a more secure, efficient and inclusive financial ecosystem is becoming a reality.
The post How Open Banking is revolutionising the payments landscape appeared first on Payments Cards & Mobile.
