How APIs are transforming the Open Banking playing field
Ever since the rise of the Payment Services Directive 2 (PSD2) coming into force in 2018, the requirement and exerted pressure on the CMA9 banks to share data with authorised third parties with customers consent really altered the Open Banking playing field. The primary purpose for this regulatory change was to promote competition and innovation in the market.
Users initially experienced the primary benefit through Account Aggregation apps allowing users to see their net financial position in one place by connecting their financial products from a range of institutions. We have come a long way since then as through the power of Open Banking, providers such as Yapily are able to operate in a regulated space allowing other Third Party Providers (TPPs), such as Comma, to securely leverage single and bulk payments for the UK SME market.
How is this all possible? Through the power of API.
What is an API?
Application Programming Interface. In its simplest form, it is the technology behind the scenes to move data between applications which efficiently creates a connected experience. There are many types of APIs that allow you to do this but vary in architecture. The most common publicly available is the REST (or RESTful) API.
Let’s use the Comma app as an example of how payment execution works. If you want to pay your HMRC bill (as heartbreaking this can be), we make sure all the systems are communicating with each other. Your bills sitting in your dedicated accounting system are ‘pulled’ seamlessly into the Comma interface via one REST API. Then when you select and confirm the HMRC bill to be paid, Comma sends the payment instruction to our Open Banking payment provider via another REST API. This prompts a response for the user to authorise the payment by logging in to their business bank account. Once authorised, the payment will reach the beneficiary account (subject to the usual bank checks). A series of APIs working together to process data into a payment.
How is Open Banking transforming the playing field?
Open Banking has truly optimised today’s world. Everyday we become closer to a cashless society, paving the way for innovative companies like Comma to even exist. Leveraging Open Banking regulation and technology has created a very competitive market where now consumers are proactively taking an interest and dedicating time to understand what their bank offers to help reduce the operational burden of running a successful business. With lack of product offering, this is driving customers to review their existing bank relationship and possibly initiating the Current Account Switching Service (CASS) .
With the CMA9 Banks forced into creating Open Banking APIs in line with the PSD2 specification, this has set the industry benchmark for all Banks across the UK. Those that are not part of this group are not required to build such APIs but are now choosing to do so due to the benefits standardisation brings them such as customer acquisition, increased customer deposits, better customer satisfaction and even new revenue streams.
One of the most recent improvements we’ve seen in Open Banking is the removal of the 90-Day re-authentication rule. This was an FCA requirement requiring the customer to re-enable the right to share data with third parties but shortly became another administrative task every quarter. Now this has been abolished, this is a step in the right direction for customer ease and ensuring TPPs are minimising customer attrition.
However, in the grand scheme of Open Banking from a payments perspective, the biggest change in the playing field has to be the innovative creation of Variable Recurring Payments (VRPs). This offering has the ability to replace the BACS payment rail in the UK. Don’t believe me? Find out more by checking out Ger Kelly’s post on ‘How Open Banking will kill BACS payments in the UK’ and let us know your thoughts!
I’ve been talking about Open Banking from a payments perspective a lot, but let’s not forget that it has its additional uses! It is a combination of product offerings that benefits people everyday. For example, Income Verification powered by Open Banking helps rental letting/property agencies confirm that a potential tenant is correctly stating their salary and avoids the need for the applicant to share three months worth of printed payslips and corresponding Bank statements. Eco-friendly and convenient. Alternatively, we have seen Rent Recognition become an absolute game changer for those who are trying to purchase their first home. This is where rental payments are being reported to the Credit Reference Agencies, making a positive impact on the customers overall scoring, maximising their chances of getting on the property ladder. And finally, from a public sector efficiency perspective, the ‘Pay by bank account’ option for tax payers to submit payments through Open Banking rather than using traditional card methods has been crucial in reducing human errors and subsequently limiting the number of late payment penalties.
In summary, it can be demonstrated how Open Banking has not only provided a competitive market across the institutions but has also benefited customers in their daily life whether that be as an individual or as an SME. With great collaborations and partnerships forever being announced that are customer centric, those who operate around Open Banking will continue to innovate and deliver for many years to come. Are you equally as excited to see what happens within the next few years around Open Banking?
