1) Banks will continue to open up
We’re five years into the UK journey and open banking is rolling out around the world. Open banking will continue to be a big trend for a few years to come before it reaches the stage of being the “hidden plumbing” that exists, powering the world without people talking about it.
In the UK, open banking payments growth is continuing to rocket. The small acorn is showing signs of becoming an oak tree, with over £8bn of open banking payments taken by HMRC alone.
With NatWest leading the way for the big banks in the adoption of variable recurring payments (VRPs), the foundations are now there for open banking to help solve a much broader range of payments, from subscriptions to frictionless e-commerce to business-to-business payments.
Around the world, open banking initiatives are now happening at an ever-faster pace. Latin America and the Middle East are the new hot spots for open banking and, next year, we’ll see a huge focus on this in North America. Canada is moving closer to implementation and the regulators and policymakers in the US could soon follow too. This is already creating a LOT of noise.
2) Embedded finance: you stay there, I’ll come to you!
We’ve talked about embedded finance for years, but the reality has yet to materialise. 2023 is the year that the banks will start to take this seriously.
By embedded finance, we mean financial services that are genuinely and seamlessly embedded in a customer experience, rather than requiring the customer to go to the financial services provider and then return to continue what they were doing. It is about getting the financial service in the right place, at the right time, with the right context.
This could mean, for example, the ability for a company to access an extended credit line instantly, based on their “cash out” and expected “revenues in”, to help them seamlessly manage their cashflow from within an accounting platform.
Or it could be allowing a customer to set up a new account from within a marketplace or enabling a bank to offer a simple ‘buy now pay later’ option within an ecommerce checkout.
This rise of open APIs will allow financial services to be ever more embedded in day-to-day experiences. Financial experiences will be embedded where the customer wants and needs them, which will be good for all players.
3) Fraud will not go away
In recent years, we’ve seen account-to-account payment fraud accelerate. Fraudsters are continually coming up with more devious ways to target the vulnerable and play on people’s fears and insecurities.
With the pandemic, we saw many fraudulent messages designed to get people to part with their money. We’re seeing it with the cost-of-living crisis too, with fraudsters playing on people’s fears about rising utility bills and other costs.
Confirmation of Payee (CoP) has come into effect and is having an impact, but it is by no means the complete solution. More is needed.
In 2023 we’ll see far more financial and payment institutions implement Confirmation of Payee, which will help. The implementation of strong customer authentication and open banking is also helping. But the industry will continue to look for what is next beyond the basic Confirmation of Payee check.
It should involve piecing together more data points from more sources to ensure that the payer has much more certainty about the identity of the payee. Identity-based payments are the future and we’ll see conversations moving beyond CoP to head in this direction.
4) Banks will monetise premium APIs
The future lies in APIs that can be monetised by the banks, which we call premium APIs.
We are now seeing a wide range of new customer-facing propositions which leverage the access which open banking unlocks to help consumers budget, reduce debt, build savings, and perform other tasks which improve their financial outcomes. There is already so much innovation, which is driving both adoption and behavioural change. Financial Institutions are also making better credit decisions by using access to account information to gain a more detailed and accurate understanding of a customer’s income and their ability to afford debt repayments.
Banks are now starting to regard open banking and open finance as key strategic channels. Historically, their channels were their branch, the telephone, and the internet. Now, exposing data and services through APIs that others can build on is opening up a whole new business model. Banks no longer have to get customers into their own branches to open products. More and more banks will shift from this mindset of seeing open banking as a compliance project to regarding it as a business model transformation using premium APIs.
5) Open finance will continue to take shape
We are still in the very early days of open banking and have not yet seen the major innovations taking place. If we compare our progress to the dawn of the internet, we’re still not even close to the point where Netscape became the first mainstream browser.
The open API approach will not stop with banks, rather it will be adopted by other industries and entities as markets expand the scope from open banking to open finance. For a customer, it is limiting to be able to see only certain accounts based on an arbitrary scope defined by open banking regulations. They should be able to see their complete financial picture and thus be able to manage money much more effectively. This ability is unlocked by open finance and open data, which involves the sharing of access to a much wider set of data and services to unlock more and more innovative propositions and use cases across multiple industries.
The move from open banking to open finance to open everything will involve banks and Financial Institutions shifting their mindset and seeing that this is a truly transformative business model.
6) Open banking will evolve new capabilities
Open banking is not just about access to bank account data or payments. There are two fundamental design patterns we have observed when working with regulators in markets around the world. We expect these new capabilities to also be implemented in other territories in the future.
The first is ‘Event Notifications’. As a bank’s ledger changes and transactions or payments are made, third parties should be able to receive updates in real time without having to poll a bank to collect that data. An always-on connection between the third party and the customer’s account delivers real value for all sorts of use cases, with particular relevance for corporates that need real-time synchronisation between accounting, ERP software and bank systems. It’s also much more efficient for both banks and third parties, as it ‘flattens’ the traffic to remove the large peaks we are seeing at certain times of the day with polling.
The second design pattern is called ‘Service Requests’, which involves the provisioning of bank services such as opening a new account, creating a line of credit, adding or changing beneficiaries or users on the account – basically enabling any task that can be completed on an online bank account through APIs.
These patterns move beyond the rather arbitrary limits that were placed around PSD2 by the EU’s RTS. If customers can do something on a bank’s online platform, they should also be able to do it via APIs and enable third parties to initiate or manage that process. There is a really strong incentive for banks to do this. Sama, the Central Bank of Saudi Arabia, has built these design patterns into its open banking standard, and we expect other markets to follow.
7) The evolution of payments will accelerate
The banking industry has quite a few challenges to overcome when it comes to payments and money movement. When moving money across borders, for instance, there’s a huge amount of friction. There are also many scenarios where the lack of identity validation for both payer and payee is causing fraud and money laundering issues.
Two big leaps will take place over the next few years involving money movement and payments.
Firstly, open banking will accelerate the availability of lower-cost instant payments, which are more reliable and come with a lower fraud risk, especially if this extends CoP into true ‘identity-based payments’ as stated above. This could transform both domestic and international payments.
Secondly, there is a massive opportunity to enable the flow of retail data, for example, basket level data on every line item purchased online or in store, alongside open banking-powered payments. This could open up many new business models for automated loyalty and much more powerful data-driven marketing.
Most payment models today have always required a middleman acting as a big switch. Open banking has delivered the foundations to be far more certain around both ends of transactions in a far more frictionless way in terms of how the payment is initiated and the messaging between parties. The potential for a massive transformation of payments, which started in recent years will continue throughout 2023.
Ozone API co-founder Chris Michael