As the world has become increasingly interconnected, fintech companies have developed innovative solutions to quickly and securely allow people to make purchases online.
Open banking is one such solution, built on a foundation of interconnected banking systems which are easier to use and provide more flexibility for payment options. The open banking model also allows financial data to be shared with third-parties, which can then be used to provide enhanced user experiences and a curated customer journey from one end to the other.
Services like NatWest Payit™, which allows customers to pay for services or receive refunds in near real-time and to automate processes such as regular transactions, have flourished as the open banking model has increased in popularity.
It’s all about making banking as secure, easy, and fast as possible while also empowering fintech companies to create innovative solutions.
The history of open banking
Although open banking is underpinned by various technologies developed over the past few decades, it was only in the mid-2000s that it became a topic of conversation. Several key pieces of legislation brought in during the 2010s further enabled and then mandated the approach, to the extent that it is now a widespread and growing field for fintech innovation.
The European Commission brought the Payments Services Directive (PSD1) into place in 2007 to spur innovation in the financial services sector. Along with making payments simpler for consumers, a key goal of PSD1 was to ease the transfer of payments across borders within the EU.
When PSD1 was revised in 2015 to become PSD2, open banking became more of a viable option for banks and fintech companies. The regulation compels banks to provide open APIs for innovations such as open banking and to provide data to approved third parties.
Amidst this fledgling legislation, the FCA set out to define the two categories of organizations approved for open banking. These are:
- Account information services (AIS), which give users an overview of all their connected accounts.
- Payment initiation services (PIS), which facilitate payments from a customer’s bank account to make them more efficient and secure.
In the UK, open banking got its start in 2016 when the Competition and Markets Authority (CMA) published a wide-ranging report into the UK’s retail banking market. Within the final report, the CMA ordered the region’s nine largest banks – including NatWest – to put open banking in place by 2018.
In the years since the mandate was put in place, all of its targeted banks have implemented either in-house open banking solutions, such as NatWest Payit™, or partnered with fintech firms to make use of third-party open banking services.
Alongside the mandate, the CMA established the non-profit organization Open Banking Ltd, which acts as the primary implementation entity for UK open banking. All UK providers involved in open banking are approved by the Financial Conduct Authority (FCA), which helps ensure standardized security controls are in place.
The CMA anticipates the need for a revision of this system in the near future, as the fintech market grows to include many more organizations that rely on open banking for their business model.
In 2023, the regulator announced Open Baking had been adopted by 6 million UK users and the International Trade Administration has estimated the number of fintech firms in the country will double from its current total of 1,600 by 2030. This is expected to add £11 billion to the UK economy.
How does open banking work?
At its core, open banking relies upon secure application programming interfaces (APIs). These allow apps to interface with one another via encrypted data, to enable unique features across different environments or share select data.
Open banking allows select financial data to be shared with third-party organizations such as fintech companies, provided the customer consents to this, without exposing PII that puts consumers at risk. This allows these companies to make data-driven decisions based on consumer data such as their credit score, or aggregate data for a specific purpose such as a budgeting app.
When a user wants to send money via an open banking service, such as NatWest Payit™, they choose their own banking provider from a list provided in the app which then sends an API request is sent to the bank to verify the request.
Once verified, the bank provides Payit™ with a payment ID, which is then used to process the payment with the vendor. All of these processes are encrypted according to the bank-grade FAPI specification for APIs, an open authorization (OAuth) high-security standard used by major organizations across finance, tech, and other sectors.
Businesses are already using open banking to speed up payment processes and give their customers a better user experience when it comes to refunds and personalized payment journeys.
For example, JS Group, which handles scholarships, bursaries, and other financial support for students on behalf of numerous UK universities, has used Payit to automate payments and leverage data to improve its insights into student needs.
Through Aspire Cash, which uses Payit™’s API, JS Group can now provide emergency funding from a partner university to students at any time of the year within 25 minutes of payments being authorized and no longer has to deal with the administrative burden of collecting and storing student bank details.
It can also now draw together data on how students are spending their funding, to give a far more detailed view of where they feel the most financial burden in their lives.
Small businesses or freelancers can also use Payit™ to request payments for services rendered directly from the app, no matter how large the bill. This is a secure route customers can use to send payments instantly or request refunds that don’t get held up for days or weeks while they’re being processed.
Because open banking enables select information such as a customer’s account balance to be securely shared, it can in turn enable irregular and personalized payments to be made.
Open Banking Ltd gives the example of a consumer being able to pay their energy bills in installments based on their account balance, rather than continually going into debt through monthly lump sum payments.
It also states that open banking data on energy payments can be paired with smart meter readings, to identify where business energy savings can be made.
Open banking is as much about consumer choice as it is about helping fintechs compete in the crowded financial market. By securely sending data across the barriers of existing bank accounts and online services, open banking allows enterprises to intelligently meet the demands of their customers and ensure they are as agile and scalable as possible.
For more information on how open banking can ease your compliance problems could help your business visit www.payitbynatwest.com .
Disclaimer
Eligibility criteria and fees apply. You must hold a business current account with the NatWest Group and you will need to sign up to full Payit™ terms and conditions. You will need to allocate technical resources to work with NatWest to integrate the solution. Fees are based on the volume and average value of e-commerce transactions. Speak to a NatWest Relationship Manager for further information.
