Commentary: Five Years of Open Banking: Embracing a New Path Forward

Open banking, the system enabling seamless sharing of financial data via application programming interfaces between banks and third-party service providers, has captured global attention over the past several years.

In 2018, the Second Payment Services Directive (PSD2) marked the official open-banking era by mandating data sharing in Europe. This milestone paved the way for banking innovation and sparked worldwide interest. Five years later, PSD3 is on its way. With a focus on regulating electronic payments and the banking ecosystem as a whole, PSD3 will further expand the influence of open banking and deepen the focus on security and consumer rights.

While open banking in the European Union is far more mature than in other markets, the United States has been embracing it for much longer than is commonly perceived. In the U.S., a market-driven approach has led to open-banking innovations for payments, taxes, and applying for loans, all without government mandates.

Ultimately, this has sped up innovation. But adoption of open banking in the U.S. market has been very slow compared to other nations. While consumers have become more comfortable linking their bank accounts, there is still a lot of progress to be made when it comes to open banking, specifically for payments.

However, we are on the cusp of remarkable change. In June, the Consumer Financial Protection Bureau (CFPB) announced. it is working to accelerate the shift to open banking through regulatory requirements that will be finalized in 2024. This rule will help to break down adoption barriers, promote competition, and, most important, safeguard financial privacy.

In the U.S., open-banking payments currently leverage the automated clearing house rails, creating a faster, easier, and more secure alternative to traditional card payments. The ACH also offers substantial advantages to both businesses and consumers. For U.S. businesses, which face exorbitant credit card processing fees, open-banking payments can save up to 70% in related costs. Additionally, consumers benefit from enhanced security, convenience, and a healthier approach to personal finances, further reducing reliance on credit cards.

Despite the clear benefits, the U.S. has faced some resistance when it comes to implementing open-banking technology. This can be attributed in part to perceived potential security concerns and a lack of education on the part of some consumers and businesses. In reality, open-banking payments provide robust layers of security for the protection of consumers and merchants alike.

Moreover, an entrenched reliance in the U.S. on incumbent payment methods contributes to a slower rate of adoption. In Europe, chip cards have been in use for over 20 years, but the U.S. only adopted them in 2015. Similarly, while checks have been phased out in various countries, they still represent 20% of payment volumes in the U.S.

This slower adoption of payment technology is not accidental. The U.S. has the highest credit card processing fees in the world, and incumbents benefit from this huge advantage. Ultimately, they are not incentivized to offer alternatives, even as the rest of the world builds better, digital-native, and faster payments.

It is predicted that the value of the global open-banking market will reach $64 billion by 2024. To achieve broader adoption of open-banking payments, several steps must be taken. First, innovation from new players will be instrumental, as the US market relies on private-sector advancements and competition, though some legislation may be helpful. Second, education about open banking is paramount to ensure businesses and consumers understand its promise and potential.

Consumer choice in the matter is also imperative. For instance, Australia’s rollout of open-banking payments served as an important lesson as to what happens when this freedom of choice is removed from the equation. In this instance, banks were penalizing consumers who switched to open banking and refused to share their financial data. As a result, thousands were blocked from opening an app-based financial account. For open-banking payments to succeed in the U.S., this is a scenario that must be avoided at all costs.

Overall, favorable macroeconomic trends, including rising costs of living and inflation, create an opportune environment for open banking to thrive. With the right innovators and adequate education, the future of payments will transform financial security, health, and convenience for consumers and merchants alike.

–Eric Shoykhet is chief executive of Link Money, a U.S.-based open-banking payment platform.