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What Impact Will UK's PSD2 Open Banking Have Worldwide?

Boaz Gam

Boaz Gam


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Article content
  1. What Exactly Is Open Banking?
  2. Top 3 Reasons Why Open Banking Is Gaining Traction Globally
  3. A Peek Into the Future of Open Banking

UK’s Open Banking Impact on the Global Payments Landscape

Open banking continues forging ahead globally, and more and more consumers and businesses start noticing its powerful impact. While the open banking concept has been around since 1983, it is the Second Payment Services Directive (PSD2), introduced in 2018, that has defined it the way we know it today.

Over this relatively short timeframe, the UK has built a world-leading ecosystem with more than 3.9 million consumers and 600,000 small businesses using open banking on a regular basis1. This impressive progress is not only increasing the momentum within the country but also having ripple effects worldwide. Read on to find out more about open banking and its future in the global context!

What Exactly Is Open Banking?

UK’s Open Banking Impact on the Global Payments Landscape

Open banking is the practice of enabling third parties to directly access consumers' bank accounts and financial data through application programming interfaces (APIs). With a user’s consent, open banking APIs allow a financial institution to transmit banking data to third parties.

Before open banking went live, if a company needed to accept payments directly from a client’s bank, both of the FIs involved had to collaborate with a third-party network. With open banking, on the other hand, all FIs must provide open access to their accounts and financial data, so businesses can accept payments from their customers’ banks without intermediaries.

PSD2 introduced two categories for open banking service providers:

  • Account information service providers (AISPs) offer account information services (AIS) by means of gathering read-only financial data. They can compile data from multiple bank accounts, but they are not able to initiate payments from them.
  • Payment initiation service providers (PISPs) have the capability to not only access and present financial data but also to transfer funds from a consumer’s bank account with their consent.

Now that the modern open banking concept is clear, let’s take a closer look at its implementation in the UK.

Open Banking in the UK

UK’s Open Banking Impact on the Global Payments Landscape

In the UK, open banking was mandated by the Competition and Markets Authority (CMA) in January 2018 with the primary goal of improving consumer choice and boosting competition in the retail banking sphere.

Initially, all the processes related to it were conducted by the Open Banking Implementation Entity (OBIE), which worked closely with the government, regulatory authorities, prominent industry players, and consumers to create a leading open banking ecosystem.

Nowadays, open banking in the UK is regulated by the Financial Conduct Authority (FCA). Thus, only businesses that are authorized by the FCA can implement open banking APIs to access financial information or initiate payments on behalf of a customer.

Effective regulation and innovative solutions have resulted in the UK achieving incredible results in the open banking sphere, with 1 million active users entering the scene every 6 months. By 2024, the number of the UK’s open banking users is expected to hit 63.8 million2.

In response to such roaring success, other countries follow suit. For instance, South Korea saw over 20 million people using open banking in 2021. In the US, the government issued an executive order to commit to open banking. What’s more, many countries are currently in the process of determining how to make open banking work in their markets. But what creates such demand for this initiative?

Top 3 Reasons Why Open Banking Is Gaining Traction Globally

There are good reasons why open banking keeps gaining traction in the UK and worldwide, namely:

1. Advantages for Consumers

UK’s Open Banking Impact on the Global Payments Landscape

Open banking enables consumers to take better control over their finances thanks to:

  • Faster and simpler payments. Users can avoid friction during transactions by authorizing direct and instantaneous payments with their online banking credentials.
  • Lower fees. Consumers can save a pretty penny on interest rates and account fees, which has been a strong incentive for the technology’s adoption throughout the years.
  • Advanced security. Open banking typically uses reliable security measures, such as multi-factor authentication (MFA), face ID, or fingerprint scans.
  • Customization potential. The insights businesses gain into their customers’ buying habits enable them to offer tailored products. For instance, a company can use open banking to promote solutions to help manage the customers’ spending, help them apply for credit, or prompt them to select payment terms such as BNPL.

2. Benefits for Businesses

UK’s Open Banking Impact on the Global Payments Landscape

Businesses of various scales also benefit from open banking in a variety of ways, including:

  • Reduced costs. Open banking helps businesses cut down costs on interchange credit card fees and third-party bank transfer network fees.
  • Faster funding. While credit card processing takes up to three business days, open banking transactions boast near-instant settlement.
  • Data insights. Companies can use financial data insights to customize client experiences, which creates a multitude of engagement opportunities.
  • Reputation boost. Using open banking technology in a bundle with biometrics and MFA helps businesses effectively prevent cyberattacks and, consequently, supports their reliability in the customers’ eyes.

3. Opportunities for Issuers

UK’s Open Banking Impact on the Global Payments Landscape

Open banking promotes financial transparency and collaboration, helping issuers to:

  • Develop new business models
  • Offer more value to customers
  • Boost consumer loyalty by leveraging financial data

One example of an issuer-led open banking platform is Mastercard's Finicity, which collects real-time data to ensure businesses and consumers achieve better control over their funds and make smarter financial decisions.

A Peek Into the Future of Open Banking

UK’s Open Banking Impact on the Global Payments Landscape

Open banking has proven itself to be an all-round beneficial solution for consumers, businesses, and issuers. Thus, we are sure to see the spread of this technology accelerate worldwide in the near future, particularly in the context of card-not-present transactions. In the UK, for instance, 60% of revenue comes from CNP payments, and open banking is a smoother and safer alternative to them3.

Experts predict the Asia-Pacific region to be the next big frontier embracing open banking due to the consumers' readiness to share data and the local culture of supporting digital innovation. Another big potential market for this technology is North America, which is already launching open banking platforms, such as Plaid.

With consumers worldwide gaining trust in open banking, businesses should actively prepare for the changes this technology will bring to start reaping its benefits as soon as possible.

1, 2 - Open Banking - UK open banking marks fourth year milestone with over 4 million users
3 - Global Payments - Sixty percent of revenue in the UK is tied to card-not-present transactions

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