The value of payments made through global open banking is predicted to reach $330 billion by 2027, up from $57 billion in 2023. Are they, however, really international? The majority of transactions are, in fact, domestic rather than international. Interoperability is a major barrier that the industry must overcome to realise worldwide open banking.
The prospect of a totally frictionless yet highly secure payment system is tantalisingly close to reality with the promise of an international open banking ecosystem. Frequently cited as an example of open banking success, the UK industry had eight million active customers by the 2023 end.
However, a closer look reveals that the United Kingdom’s figures are merely a drop in the ocean of global payments. Currently, 0% of British citizens use open banking. Even if there were a record 14.45 million “UK Open Banking” payments made in January 2024, the tens of billions of card transactions handled by the major card networks dwarf this achievement.
Although cross-border payments are taking up a larger portion of the global payments market, there are still challenges in establishing open banking cross-border due to the lack of interoperability between country systems. Data will not be able to move freely between various businesses, or even different countries, until that time. The goal of open banking is to promote customer safety while increasing competition among retail banks.
The Asia-Pacific area has witnessed notable advancements and breakthroughs in the field of open banking. Notably, India has led the way with its innovative Unified Payments Interface (UPI). The 1.4 billion people who live in India are mostly responsible for the critical mass of transactions that drive UPI’s success, but another important factor is its compatibility with other Asia-Pacific payment systems, such as those in Singapore, Thailand, and Malaysia. UPI has already partnered with Google Pay in 2024 to facilitate worldwide payments, and with Lyra in France to facilitate UPI payment acceptance in France. Indian tourists can now use UPI-enabled apps to instantly pay using UPI to a variety of businesses via cross-border QR code transactions between India and Nepal.
However, in other places, the goal of fully realising open banking remains unfulfilled. To make it a reality, different areas will need to provide uniform guidelines, benchmarks, and the necessary technological components.
Interoperability in open banking
The capacity of permitted third parties to access account information and start payments with client approval is a fundamental feature of open banking. Banks have two options for accomplishing this: using specialised APIs or their current consumer interfaces. However, participants are free to create their interfaces as there are no standardised APIs in place. Despite multiple regional standardisation initiatives, APIs remain highly fragmented, which makes achieving interoperability challenging.
No matter which bank or service provider a customer uses, interoperability is essential to enabling the patchwork of systems used by various banks, fintech, and third-party players (TPPs) to communicate with one another, exchange data securely using a common standard, and enable easy access to all of their financial data.
However, standardisation is necessary for interoperability, and at the moment, the majority of open banking markets follow regional standards. Since its regulator was the first in the area to outline an open banking framework in 2016, Singapore, along with South Korea and Hong Kong which adopted comparable strategies, has seen a significant increase in the use of APIs. With its Customer Data Rights, Australia has adopted a regulator-led strategy, requiring financial firms to use open banking. The regional examples mentioned above demonstrate that cross-border data sharing is possible despite the numerous legal obstacles to overcome.
Teamwork: A crucial factor
While not easy to solve, interoperability issues are not insurmountable. There are several important questions to ask. Who provides the funding for interoperability, or perhaps for creating a completely new payment system? In markets without a central authority to organise workflows, ensuring conformity to multiple technological and legal baselines will take herculean efforts.
Reaching consensus and allocating funds is difficult enough. Without a comprehensive regulatory framework to direct them, no payment player would dare venture out and start operating independently. One could argue that without initially enacting national regulations, it will be challenging to guarantee regional or worldwide interoperability. However, as previously demonstrated, national market-led strategies have also been successful.
The European Union has recognised national bank and TPP licenses because of the long-standing harmonised legal frameworks like PSD2. The Asia-Pacific region has implemented a combination of regulatory and market-driven strategies to guarantee API standardisation and technical foundations are in place, creating the ideal environment for open banking to flourish.
When third parties and financial institutions work together under the guidance of regulatory input, open banking initiatives are successful. We also need regulators from various nations to collaborate, exchange best practices, and invite open banking organisations and standards organisations such as ISO.
The European payment industry is currently preparing for PSD3, the new Payment Service Regulations (PSR), FIDA, and other frameworks that will level the playing field between banks and non-banks and completely change how fintech and financial services companies handle customer data throughout the continent. It’s time for industry participants to recast open banking as a business opportunity rather than a regulatory requirement.
PSR will enable Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) to create unique API interfaces that link to banks and other payment providers directly. On the surface, this ought to increase open banking’s acceptance and uptake.
However, banks and other payment companies will also need to provide quarterly reports on the availability and performance of their APIs. By encouraging improved API build quality to connect with banks, this API “league table” could accelerate user adoption and point companies in the direction of the top providers.
PSD3, which takes into account new difficulties in fraud, digital payment transformation, access to payment systems, and open banking baselines, is more expansive and exercises more muscle than its predecessor PSD2. The proposed PSD3 text, however, states there will be no fees for using open banking interfaces and no requirement for standard APIs, meaning thousands of PISP/AISP APIs operating differently.
While PSD2 made open banking a reality by allowing bank APIs to allow customers to consent to the sharing of their data with third parties, this remains a possibility. This means that the limitations of individual APIs and the absence of a clear commercial pricing consensus may hinder adoption and impede the process of bringing Europe and the rest of the globe closer to interoperability.
About almost all financial services data, including current and savings accounts, credit cards, mortgages, loans, and pension accounts, FIDA seeks to grant financial information service providers (FISPs) the ability to obtain real-time client data. It implies that to make better lending decisions, lenders and credit providers, for instance, will have access to more and higher-quality data.
To give you an idea of what that might entail, Experian data from 2022 indicates that more than five million individuals in the UK who are referred to as “credit invisible” were not eligible for the best credit rates and packages because there was inadequate information available about their financial histories. Millions of people with “thin credit files” who are nevertheless creditworthy may be able to access additional services thanks to FIDA since it uses real-time data rather than the static historical data used by conventional credit scoring methods.
Fintech ventures and banks may increase data-driven decision-making, lessen risk exposure, lower default and delinquency rates, and benefit from fewer credit losses by utilising real-time transaction data from a larger range of consumer account products. Lenders may now see a complete, high-definition image of an individual’s financial situation thanks to real-time open banking and open finance data, rather than depending on incomplete snapshots of their clients’ financial situations. What was the outcome? More highly customised goods and services increase market share, foster greater client loyalty, and increase consumer involvement.
Before these legislative changes take effect in 2025–2026, banks, fintech companies, and other third-party participants must act quickly to make sure their technological platforms and business procedures can accommodate them. Putting money into risk monitoring, anti-fraud measures, and a software platform that can adapt to changing rules will open up a world of possibilities for innovation and teamwork, as well as help to establish a genuinely global open banking ecosystem.