The path forward for open banking payments

Reducing friction is an important goal for financial institutions and their customers alike. Open banking payments (OBP) does just that, serving as an on-ramp to existing account-to-account infrastructure.

The move from concept to reality has been rapid for OBP

While the topic of OBP isn’t brand new, it’s a current focus of much conversation within the payment industry—for good reason.

OBP offers the potential to bring account-to-account payments into a range of workflows, generate new revenues and cost efficiencies for banks, and strengthen the customer experience through innovative payment services.

Financial institutions should view OBP as an important area of the open banking opportunity and consider both the immediate use cases and customer experience benefits it offers.

OBP applied – use cases

OBP is defined as “a payment initiated via open banking API by a licensed third party on behalf of a customer. The movement of funds occurs over the existing account-to-account infrastructure, with settlement directly into the nominated account of the payee.” OBP isn’t a new payment tool, but it offers an alternative method for initiating a credit transfer.

OBP is being used to drive down the direct costs and friction of accepting digital payments and to bring efficiencies to other areas of workflows. Where both elements are included, the benefits are magnified.

Contemporary use cases in the market fall into five areas:

1. Digital commerce: When the concept of OBP first emerged around 2018, the market wasn’t initially ready to support use cases in digital commerce, despite it being seen as the biggest opportunity for OBP. That’s changed. While the market is still in its infancy, OBP is now well positioned to play a growing role in the digital commerce landscape, particularly when used directly to make payments and when relied on as a lower-cost funding source for some third-party wallets and fintech services.
2. In-app account funding: Because average transaction values tend to be high, the current costs of accepting these inbound payments can also be high. Therefore, OBP is a particularly strong option to be used instead. OBP can significantly improve the process of funding digital accounts (including those with fintechs, neobanks, remittance providers, third-party wallets, and those in the gaming and gambling space).
3. Bill payment and collections: OBP offers an efficient way to shift costly-to-administer payments (e.g., those via card payment, cash, cheque, or single initiated credit transfers) to a more efficient credit transfer process, which can also streamline reconciliation of inbound payments to a customer’s account.
4. Invoicing and collections for SMEs: OBP can also enable new services to meet the needs of small and medium-sized enterprises (SMEs). A range of fintechs and providers of adjacent services are looking to leverage OBP to deliver services in this increasingly competitive segment, which strengthens the case for banks to investigate their own offerings in this space.
5. Donations and charity: Financial institutions can support fundraising through OBP-driven workflows, which capture necessary information to process tax documentation about the donations.

The opportunities of OBP

Though OBP isn’t a panacea, it does bring potential improvements to the use of existing payment tools in a range of use cases. One of the most important of these is the economics of using account-to-account infrastructure. Service fees can apply in many scenarios, but the costs associated with accepting OBP transactions are lower than those with payment cards or digital wallet transactions where payments exceed a certain threshold.

OBP also offers other cost benefits, including for liquidity (where the ability to receive cleared funds in real time is prioritised) and reconciliation (to lower the costs of processing costly payment types or those where manual reconciliation is required).

OBP also provides significant flexibility. As a function of open banking, the nature of open banking payments means that payment initiation APIs can easily be embedded into new and existing workflows—with a level of standardisation that wasn’t available previously. This drives value and efficiency, supports product innovation, and accelerates digitisation of workflows

OBP’s role in enhancing the customer experience

Customer adoption of open banking payments is growing. OBP offers an upgraded experience for customers to initiate a credit transfer, particularly via mobile device. This is delivered via improvements to both ends of the payment journey, whether the payment service user (PSU) is either payer or payee.

Rather than moving into a separate workflow to initiate a credit transfer (e.g., to pay a credit card, insurance, or utility bill), this can be presented as an integral part of the transaction the customer is making.

Instead of having to manually enter the account details of the recipient and an appropriate reference field, this is prefilled, smoothing reconciliation of inbound payments to the customer account and effectively eliminating the risk of funds being misdirected.

When OBP is embedded into an invoice workflow (even directly into an invoice via a QR code), an SME client can issue a payment request or a detailed invoice to a recipient. The customer can then immediately initiate a payment in response, often on the same device on which they receive the invoice, streamlining (and even removing frustration from) the process.

The rapid, rewarding move

The move from concept to reality has been rapid for OBP. At a time when banks have lost significant ground in the market to non-bank players and new entrants, open banking payments provide an appreciable opportunity for financial institutions to respond.