Open Banking: A Game Changer for Digital Payments?

by Michael Tomlins on January 28, 2021


The concept of Open Banking plans to change the retail banking landscape beyond recognition. For many years governments and financial regulators have adopted varied different strategies to create greater competition between retail banks, which have largely been unsuccessful. Customers have been unable to differentiate between the limited number of propositions on the market, feared the administrative headache of migrating current accounts and direct debits or, frankly, just do not care enough. 

Open Banking is the provision by Banks of externally-facing APIs that, subject to account holder authorisation, allow third parties to securely access their customers’ bank account data to either collect and confirm identity information, account status, transaction data and to set-up and initiate payments. The availability and functionality of APIs does remain in the gift of individual banks and territories, and is driven by both regulatory and commercial levers, however technological standardisation is driving regulatory alignment in territorial blocs, such as the EEC and GCC.

The highly innovative and agile fintech industry is leveraging Open Banking to develop new services for merchants and customers, which retail banks would be unable to launch due to their legacy technology stacks and bureaucratic processes. Growing public apprehension towards contact with potentially COVID19-contaminated surfaces has further moved the needle of digital transformation across the financial services industry.

How big is the market for open banking?

According to a report published by Allied Market Research, the global open banking market was worth $7.29 billion in 2018, and this is expected to reach $43.15 billion by 2026. 

Swwift attributes the growth in this sector to greater smartphone penetration which subsequently increases the level of control that bank customers have over their banking services and the increasing influence of Alternative Payment Methods in e-commerce; Open Banking will be used to support the growth in mobile wallets and direct debit, which on its own is expected to rise to around $4.6 billion by 2026. 

PSD2 and open banking growth drivers

Kick-starting the open banking movement in 2018 was the European Payment Services Directive (PSD2), which formalised the relationship between banks and fintechs by bridging the gap between customer account data and payment infrastructure. Adoption of this type of legislation in various parts of the world (Australia, parts of Asia, Latin America) etc. soon followed, demonstrating a shared global customer demand for a more efficient and intuitive banking experience. 

The active approach taken by government regulators is boosting the open banking agenda. Ernest & Young highlights a number of regulatory changes in the UK driving this - the FCA’s Technical Approach to PSD2 implementation, Cash Management Account (CMA) banking reforms, as well as a new Open Banking Implementation Entity (OBIE) to support the industry transformation. These regulatory requirements and standards help to foster a healthy competitive environment by reducing the merchant costs associated with payment processing. In markets where regulation has not been introduced, banks have identified the potential commercial benefit and publicly released APIs to allow third parties to access their technical infrastructure.  

For banks and merchants, growth drivers can be attributed to:

●      The need for banks to make up future lost income

●      Customer’s expectations for a better experience, especially in the mobile-first, e-commerce lead economy

●      Innovation and new technologies (e.g. financial management apps) that are difficult to build on legacy banking technology and create greater customer engagement.

Benefits of open banking to customers

Because open banking facilitates efficient, consented access to customers financial information, it should result in a better customer experience. Some features of this improved customer experience include:

●      Convenience. Banking customers are presented with more options for financial management, borrowing, and payments with little or no administrative effort. 

●      Personalisation. Due to the access that APIs provide to customer information, services such as advice, loans, regular transfers etc. are better tailored to customer’s needs, and accessed more easily. 

●      More innovative solutions. Open APIs allow app developers more creativity, promoting the use of AI to predict events to suggest cost-saving measures.  

●      Streamlined lending. Access to financial products could get easier as the process of manually gathering information from various sources for the lender’s consideration becomes obsolete. Customers can permit lenders access to whatever information they require to make better offers in near real-time.

●      Automated accounting. Consumers may benefit from easier and less cumbersome accounting processes through access to integrated systems which update automatically when payments are made or received.

●      Lower Prices. Price reduction from banks that had not been forthcoming due to lack of competition are now reducing the cost of engagement. 

Benefits of open banking to merchants

The potential that open banking has to enable merchants to provide their customers with a better overall experience, offers the opportunity to build and strengthen brand trust and loyalty. 

One major benefit of open banking is the potential for immediate payments - which Swwift defines as infrastructure that enables real-time clearing of payments. A recent survey demonstrated that 4 out of 5 merchants expected real-time payments to deliver cost savings to their business. 


This expectation also prevailed on a global level as a significant number of merchants in various countries expected real-time payments to replace card payments in the future. 


Other benefits that open banking delivers to merchants include the ability to identify customers faster, reduce pressure on cashflow and the eliminating the potential for chargebacks. 

How about traditional payment processors?

Creating a new layer between banks and their customers through open banking is bound to cause a significant shift in the market dynamics, especially surrounding the card payment cash cow. As payment card alternatives (such as direct debits) cost less than cards to process but remain limited in their ability to serve customers beyond recurring payments, open banking APIs are perfectly placed to reduce the cost of processing single payments with a lower barrier to entry by design. 

Some analysts fear that this might render the role of payment processors obsolete, and the strategic response from payment processors seems to be the acquisition of data aggregators (e.g. Visas acquisition of Plaid or Mastercard’s acquisition of Finicity), a move which could position payment giants as trusted intermediaries allowing information flow across the financial landscape. 

Challenges of open banking adoption

The expected challenges of open banking range from security and privacy concerns to increase in competition, and resistance to adopting new technologies. These challenges include:

  1. Complexity in connecting fragmented multi-channel to proprietary banking infrastructure;

  2. Potential reticence from the banks to expand the scope of the APIs made available;

  3. Third-party access to sensitive customer data will require complex privacy regulation and consumer trust could be harmed if breaches occur;

  4. Customer’s consent/trust for access to sensitive banking information may be hard to obtain without significant education;

  5. Less well-evolved consumer protection and recovery of funds regulation in the case of fraud or human error

  6. Limitation in support available for recurring payments universally;

  7. Lack of integrated cross-border transaction solution, leading to costly bank account set-ups in each territory; and 

  8. Complexity in integrating customer benefits such as loyalty points, cashback and card-driven discounts. 

As the payment industry continues to evolve, fintechs are increasingly partnering with banks to offer well-rounded, complimentary solutions which increase the geographic penetration of open banking solutions. Banks bring high security standards, credibility and a strong customer base while fintechs bring cutting-edge technology, improved user experience and the agility to respond to rapidly changing market trends.  Open Banking enabled services are gaining traction in many areas such as: mortgage and rental, point of sale lending, earned wage income, peer-to-peer payments, automated retail investing, online banking, charitable donations and e-commerce payments.

Apaya is a mobile-first digital payment gateway providing merchants a fully localised experience for their customers, including a range of alternative payment methods such as carrier billing, mobile wallets and open banking in over 50 banks across EMEA, all with a single integration. It also provides significant opportunity in sectors where immediate payment is required especially within the service sector – food delivery, transport, tickets etc. 

We believe open banking has the ability to challenge the market dominant position of payments cards, presenting new opportunities for merchants to expand their activity into new customer demographics and geographies. Furthermore, it will not only provide customers with a frictionless payment experience within a trusted eco-system but most importantly greater control over their banking data and the option to use this data for their benefit.