Open banking in Europe: What can it tell us about where payments are headed in the US?

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Editorial Team , Link Money


Monday, February 6, 2023

A map of the world with Europe pinpointed

The UK and EU are often seen as the epicenter for open banking globally, since launching a legislative approach to kick-start the sector with the second Payment Services Directive (PSD2) in 2019. This regulatory initiative mandated that banks must open up their APIs to third-party open banking providers, and triggered a wave of investment and startups in the space. 

As a major global economic hub that is a couple of years ahead of the US in terms of market maturity, what can we learn from the state of open banking in the UK and EU?

Open banking payment volume in 2022: the hockey stick has begun

Getting exact transaction volumes of open banking-powered payments is not possible due to the many different domestic markets in the EU as well as the fragmented nature of the API landscape. However, we can look at the UK as an indicator. As arguably the leader when it comes to open banking innovation globally, as well as a card-dominated market that is more similar to the US in terms of payment methods than other European countries, it also serves as the closest proxy available to measure how fast open banking payments could conceivably grow in the US. 

According to the UK’s Open Banking Implementation Entity (OBIE) the number of successful payment initiations made using bank APIs increased from under 1 million in November 2020 to over 7 million in November 2022. You can see the trend in the chart below.

This chart shows the number of successful payment initiations made by third party providers using account providers’ (ASPSPs)* Open Banking APIs.

With online card payments well into the hundreds of millions transactions per month, this 7x plus increase in two years demonstrates that hockey stick growth is absolutely possible, while at the same time there is still plenty of upside potential. Looking forward, a recent study by Juniper Research found that open banking payments are predicted to account for $87 billion of Europe’s transaction volume by 2026.

Innovation continues with instant and Variable Recurring Payments

Instant payments

Instant payments allow funds to be transferred in seconds but are not always available or cost-effective, especially cross-border. However, there are moves to change this — and open banking could be a big beneficiary. Late last year, the EU drafted a law to require banks across the union to offer and receive instant payment services for a fee equal to or lower than for traditional credit transfers.

The mandatory adoption of instant payments will allow open banking providers to give merchants instant confirmation and verification that the transaction has been executed and settled, speeding up cash flow for merchants and paving the way to wider adoption of open banking payments for e-commerce. While this is not yet law, it does give a strong signal to the market of the regulatory commitment to making online payments fairer and faster. 

Variable Recurring Payments (VRP)

In the UK, a mandate was introduced for the biggest nine banks to support VRP for sweeping by the middle of 2022. This refers to the automated movement of a customer's funds between two accounts in their name, such as a current and savings account, and is used to do things such as help customers avoid overdraft charges, repay loans or benefit from better interest rates.

However, this use case is only a hint of the potential. In the future, merchants will be able to automatically collect payments of different values from their customers. VRP will have the capacity to compete with major UK recurring and subscription payment methods, including direct debit and card-on-file. Once again, while this is not yet mandated, the future for VRP could usher in a new era of open banking payments as a go-to payment method for recurring purchases. 

Open banking in Europe: A legislative approach that is driving progress (but isn’t always perfect) 

The regulatory approach adopted by the EU has several pros, compared to the market-based approach in the US. For example, mandating that banks open up their data to third parties makes it more likely that they will do so, and also help avoid protracted individual negotiations between banks and third-party providers (TPPs) to access bank data. 

Furthermore, with a market-driven approach, it can be more appealing for open banking providers to use questionable — and even risky — data collection practices such as screen scraping so they can sidestep negotiating with different banks. In fact, screen scraping is already partially outlawed in the EU. 

Nonetheless, a regulatory-driven approach also comes with some potential issues, such as sometimes conflicting rules, or making rules that are difficult to enforce, leading to further delays. Furthermore, if regulations only make basic requirements of banks, many of them will not go the extra step to make sure their APIs are stable, easy to use, and provide the data necessary to facilitate payments and really innovate. 

Rapidly increasing consumer adoption and an exploding ecosystem

The UK and EU are seeing waves of investment in fintech in general and open banking in particular. There are now almost 250 regulated open banking third-party providers in the UK, and approaching 350 in the European Economic Area. And the European ecosystem is innovating rapidly.

We are still in the early stages of our open banking journey in the US. But in contrast, our ecosystem lacks comparable investment, and as a result, innovation. And without regulatory incentives to drive open APIs, progress in developing services is slower than in Europe. 

Nonetheless, a number of innovative startups, spearheaded by open banking providers such as Link Money, are pushing the way forward. In fact, Link Money already has reliable connections to 3,400+ U.S. banks, reaching 90% of bank accounts in the market.

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