Minerva Studio - stock.adobe.com

Payments through open banking could end card dominance

Payments made through open banking will eat into those made using cards as the next five years sees an acceleration in adoption

Payments made through open banking functionality could end the dominance of cards for making payments, with Europe leading the way.

According to a study from Juniper Research, the global value of payments made through open banking will be $116bn by 2026, signalling that the finance sector is on the cusp of a major acceleration in take-up. Open banking payments will account for just $4bn of total global payments this year, said Juniper.

Increased user awareness is expected to drive the increased take-up over the next five year,s with Europe leading the way and expected to account for 75% of the total in 2026.

The study’s co-author, Damla Sat at Juniper Research, said: “While PSD2 is a great starting point, it is not the end goal for open banking – supportive regulation must be a platform for much greater innovation. The race is on for vendors to build the most compelling capabilities for the future of open finance.”

Open banking services were made possible by the EU’s Payment Services Directive 2 (PSD2), which came into effect in 2018. PSD2 enables third parties to access the customer data held by banks via application programming interfaces (APIs), if customer consent is granted, and offer services using this information. For example, a company, with your consent, can take a payment directly from your account without you leaving its website. In the UK, the Open Banking Regulation is its equivalent.

Juniper Research recommends that API suppliers look beyond regulatory minimum requirements “to develop advanced use cases such as aggregation of additional products, including loans, credit cards and mortgages, as awareness builds”.

In the UK, banks were required to implement the Competition and Markets Authority’s (CMA’s) open banking regulations, which mirrors PSD2.

Figures from the UK’s Open Banking Implementation Entity (OBIE) said that more than four million open banking payments were made in the UK in 2020, compared with 320,000 in 2018, and nearly six billion API calls were made to servers in the UK, compared with just 66.8 million in 2018.

The open banking revolution recently received a huge boost when card companies Visa and Mastercard made major acquisitions of fintechs in the sector.

In June, Visa acquired Swedish open banking fintech Tink for €1.8bn, which was followed by the take over of Denmark’s Aiia last month.

With Juniper predicting that payments through open banking APIs are set to end the dominance of payment cards, it is not surprising the card companies are acquiring open banking capabilities.

The huge marketing machines behind Visa and Mastercard will take open banking, which is often held back by a lack of consumer understanding, to new levels of adoption, while the massive tech development budgets and teams at the card companies will increase open banking functionality.

Speaking to Computer weekly following Aiia’s acquisition by Mastercard, co-founder and CEO Rune Mai said: “Combining the power and distribution of a company like Mastercard with the technology we have was a huge opening. We want to grow fast, but we want to scale out in a way that we get a lot of customers that improve our technology.”

Meanwhile, following its acquisition by Visa, Tink CEO and co-founder Daniel Kjellén said: “We have built something incredible and – at the same time – we have only scratched the surface,” he said. “Joining Visa, we will be able to move faster and reach further than ever before.”

Read more about open banking

  • The completion of complex open banking initiatives could still be over a decade away for many companies in the finance sector.
  • Competition and Markets Authority requests feedback on proposals to increase competition in the UK banking sector.
  • Open banking is a relatively new concept, having come into effect in Europe only in the last couple of years. So what is the state of play?

Read more on IT for financial services

Data Center
Data Management