How open banking can transform the U.S. payments market

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Europe's open banking movement has been a catalyst for fintech innovation, and it has come to the U.S. primarily through fintechs that operate on both continents. Now there's interest in the concept from more than a compliance standpoint.

Open banking is part of Europe's Revised Payment Services Directive (PSD2), which encourages competition and innovation by requiring banks to share data with third parties such as payment technology companies. In the U.S., the potential to duplicate PSD2 by creating customized payment methods through new apps and data streams will be too much for banks and merchants to ignore in the coming months.

Much of the interest in advanced data-supported digital payments comes from consumers' increased comfort with online banking and shopping during the global pandemic. And yet, open banking in the U.S. has advanced only gradually.

Some view Visa's shelved attempt to acquire the data network Plaid as a setback, though the ramifications of the companies backing off the deal last week to avoid a Department of Justice anti-competition lawsuit could also fuel open banking projects.

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Open banking's potential "is really interesting, and this Visa-Plaid decision is a milestone along this journey of how far have we come, or wondering where we are," said Clayton Weir, chief strategy officer at FISPAN, a provider of embedded banking platforms.

"In terms of the open banking journey, with the Plaid situation, now we don't really know about our progress, as we may have actually gone backward a bit," Weir said. "It's really tough to say, plus you have to look at the winds coming out of Washington, D.C., with a new administration. It all makes it hard to say where we are on this journey."

FISPAN, of Vancouver, British Columbia, provides technology that turns banking services into branded banking experiences within the software that clients use to run their businesses.

Given the power behind both Visa and Plaid, it is likely that both of those companies will land squarely on their feet, with Visa concentrating on other partnerships and further developing its vast global network and digital services. Plaid, meanwhile, is likely to strike out on its own even further, with some speculating the company could move toward its own IPO.

"I'm not sure the Visa-Plaid situation should be considered a blow to open banking," said Ron van Wezel, senior analyst in retail banking and payments for Aite Group. "Plaid is well positioned to support the growing need for open banking solutions in the U.S., and one could argue that the company will remain more agile as an independent player."

Custom-built payments

As more banks lean on fintech developers for new payment technology that will keep them competitive, merchants and consumers can expect to look at payments and banking services as something completely embedded in their lifestyles.

As such, each consumer could have individual payment platforms arranged in advance that take into account all of their personal preferences on the use of cards, mobile, rewards or cryptocurrency as well as payment schedules with various installments and flexible payment amounts.

"That is absolutely what is going to happen, and is already happening in many parts of the world," van Wezel said of customized payment methods. "Merchants need to support the payment methods that their customers prefer. Globally, alternative [noncard] payment methods have already surpassed card payments in terms of dollar volume processed."

The U.S. and Canada are still strong card markets, but this can change when new payment methods are introduced based on real-time payment rails, P2P options like Zelle and Venmo, or crypto payments, or even other means, van Wezel added.

"The point in the value chain we should pay attention to in thinking about that POS transaction, whether online or in-store, is that it absolutely is about the experience of the consumer, and that plays into everything a bank is trying to do on the retail side of the coin," FISPAN's Weir said.

"All of the innovation will be there in establishing payment preferences, whether it is bitcoin or always using an American Express card and using the points," Weir added.

On the merchant side of the transaction, innovation will allow for more financial inclusion and also make cash cycles and other aspects of business easier to navigate, Weir said. "It's sort of like the Big Bang of the total life of financial innovation, and that's where the most dynamic change is coming."

That sort of dynamic is fueling the rise of technology used by Adyen, Shopify and others, while also opening the door for a startup like Alviere and more experienced players like i2c, Marqeta and others. All of these companies are looking to change the face of the point of sale terminal, move digital banking services into a business setting, or keep money movement and digital transactions in the forefront of a challenger bank's services.

Collaboration remains key

The expansion of payment technology through open banking can spark numerous use cases, some of which are getting traction.

Merchants or their payments service providers are initiating payments directly from a consumer's bank account to settle a purchase along real-time rails, or offering customers instant financing at the point of sale after building a credit score in real time based on that customer's bank account history.

When thinking about open banking, PayPal should be seen as an example of what happens when payments technology rolls out to change a traditional landscape, Weir said.

"PayPal created, apparently, about $500 billion worth of value by getting people to transact where they wouldn't have before and enabling layers and patterns of commerce that would have been impossible to do without PayPal," Weir said.

"That's a narrative that open banking could really capture and run with," he added. "There is certainly going to be more economic opportunity and it is going to be easier to build and innovate on top of current financial services. On the distribution side, there is massive opportunity for banks to distribute all kinds of value-add solutions from different fintech partners to their customers."

There's growing sentiment that banks should be aggressive in pushing technology to beat other competitors to the punch in the business-to-business and retail spheres.

"Banks should put their services right in the heart of all of the potential applications today, deep into the operational tools that businesses use, thus making banking seamless, and making new banking products that work with those business tools," Weir said.