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Five predictions for open banking in 2022

2021 was a year of progress for open banking across the EU and UK, with strong growth in both the volume of API calls and number of TPPs (third party providers) in each market.

2021 open banking predictions

In addition, regulatory changes in the UK such as the FCA’s removal of the 90-day re-authentication rule and the Competition & Markets Authority mandate for Variable Recurring Payment (VRP) mean that businesses and clients will be even better placed to offer more innovative and seamless services to consumers in the years ahead.

This is also occurring against the backdrop of global growth in open banking. According to Allied Market Research, the open banking market is growing at over 24 percent annually and is expected to reach USD 43.15 billion by 2026. Internationally, Open Banking usage doubled from 2018 to 2021.

What exciting developments will open banking have in store for us in the coming year? Here we make five predictions based on 2021 developments, what we are seeing in the market, and what we believe will happen with a little collaboration, innovation, and ambition from key players.

1. Solving the complexity of API standards will be a defining competitive advantage

The disparate API standards being used in different markets, combined with the variation in how banks comply with PSD2 regulations, means that a great deal of complexity must be solved before business can create consistent customer experiences. And this complexity is not only across different markets, but also even different banks.

One possibility is that fragmented API & data standards of today will unify into one common standard, potentially Berlin in the EU and/or the Open Banking standard for the UK and Ireland. This may come about due to regulation, or incentivising banks to standardise how they comply with PSD2 and Open Banking.

But in the meantime, businesses that can roll out innovative open banking solutions at scale across Europe will gain all the first-mover advantages of market share and iterating quickly on their products.

But to do this, the right TPP partnership(s) are critical. Businesses and TPPs that work together to solve issues such as what bank and market coverage is needed for maximum impact, and what their roadmaps look like and how they can (if necessary) be synchronised, have a very big opportunity to accelerate pan-European innovation at scale in 2022.

2. Open banking payments will take a leap toward mass adoption

Card payments are becoming problematic for a number of reasons. In particular, three fees – an acquirer mark-up, a card scheme fee, and an interchange fee – are either absorbed by merchants or paid for indirectly by customers in the form of higher prices. Newer payment methods such as BNPL are still growing fast, but coming under increasing regulatory consideration as well as lingering questions about suitability for some consumers.

We have discussed the advantages of open banking payments – lower cost, a smoother payment flow, almost zero fraud, faster cash flow, and more – elsewhere. In addition, open banking payments is a pan-European payment method - as the barriers to trading across borders become ever lower, it has the potential to become a standard across all EU and UK markets.

So will 2022 be the year open banking payments delivers on its promise?

The signs look good. According to the OBIE, by the end of 2021 over 26.6 million open banking payments had been made - an increase of over 500% in 12 months. In terms of regulations, in the UK the mandate for Variable Recurring Payment (VRP) is a game-changer. And this increasing volume is not just limited to Europe. There are 58 countries currently rolling out open banking payments initiatives.

3. Data categorisation will become increasingly important

Gaining insight into transaction data direct from your applicant’s or customer’s bank account can help business such as lenders, utility or subscription-based companies, financial services, fintechs and more, make smart, objective decisions on how to serve their customers.

But if this valuable data is being assessed manually by humans, there is always the chance that certain spending or saving patterns are not fully recognised, or that error can creep into your processes.

Enter data categorisation. Automatically categorising data as expenses such as groceries, eating out, or rent for consumers, or salaries, marketing operating costs for businesses, can help you identify cycles in your applicant’s financial profile, and predict upcoming payments, transaction amounts, and time intervals. This elevated visibility into transaction data enables you to see patterns that are not immediately obvious to an individual person assessing data from a single account and gives you an extra edge in assessing risk.

Utilising data categorisation has a wide range of SME and consumer use cases. For example, lenders and leasing companies can quickly see not only how much money is going in and out of a given account, but also the applicant’s fixed costs (rent, equipment leasing) whether they are paying off other loans, and so on. And there are also a wide range of use cases for consumers. Data categorisation can help personal finance apps make smart suggestions on budgeting and spending, insurance companies and lenders can offer highly tailored products. And with loyalty cards, some very intriguing possibilities become apparent – for example incentivising people to shop at certain places based on their financial profile.

The potential of data categorisation to drive business growth has not yet been fully leveraged – and 2022 could be the year.

4. Differentiated online tools will be built on top of APIs

The first few years of PSD2 have been a story of APIs providing raw account data to businesses. While APIs will continue to power open banking growth and innovation, there is also an opportunity for out-of-the box online tools to come into their own. These tools will serve a variety of different use cases, helping organisations make smarter decisions around lending, leasing, managing debt, and more. They will be particularly suitable for businesses that want to benefit from open banking innovation but do not have or do not wish to invest their own development resources in working with account data supplied by APIs.

5. The flywheel effect of account information and payments will spin in earnest

It may seem like open banking-powered account information and payments are distinct from one another. However, the benefits of combining the two has the potential to add up to greater than the sum of each individual part.

Here’s a hypothetical example for an SME lender. With account data, an SME lender can: make smart decisions on the following:

  • Make objective decisions on how much to lend the applicant.
  • Speed up the approval process, meaning more applicants can be onboarded with the same resources.
  • Know when to bill the applicant based on the moment in the cycle they are most likely to have cash in the account, leading to lower default rates.

So far so good. But at scale, transaction fees will eat away into the interest charged on each loan. And on top of that, despite your smart decisions, there will still be the odd overdue payment or default.

This is where payments can become an extra growth lever in your open banking initiatives. Open banking payments are far cheaper per transaction than card payments, almost completely free of fraud, and are instant, speeding up lenders’ cashflow. And if you do need to follow-up on a late payment, you can nudge with a QR code or link in a text message, increasing your chance of conversion and further driving down your cost of doing business – resulting in a leaner organisation that can grow faster that competitors.

Hand-in-hand, in 2022 account information and payments have the potential to help many different organisations become smarter, faster, and more efficient.

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