Open banking has come to encompass so much that it can be hard to define. At its heart, open banking is about opening consumer financial data—once the sole domain of banks—to third-party service providers that manage the data using APIs.

In a recent PaymentsJournal podcast, Vladimir Jovanovic, VP of Innovation at Velera, and James Wester, Co-Head of Payments at Javelin Strategy & Research, discussed open banking’s evolving regulatory framework, its benefits for banks and credit unions, and its accelerating adoption in the United States.

A Changing Perspective

Most consumers don’t understand the infrastructure or the technological innovations driving open banking, but they are fully aware of its benefits.

“They understand it in terms of access to third-party services, streamlined onboarding processes, and embedded finance and payments,” Wester said. “They may not know the umbrella term, but they have adopted open banking, and they’ve come to expect it. Whether they know it or not, open banking has affected the way consumers view banking and financial services.”

The days of screen scraping, a method third-party providers used to access financial data, are over. Now platforms like Plaid and MX are, in many instances, required to use structured APIs to pull consumer financial data back. Banks and other payment ecosystem participants  are joining with other providers of financial services to participate in consortiums like the Financial Data Exchange (FDX).

The members of the FDX consortium work together to standardize the APIs that enable data exchange between participants. Concerted efforts like the FDX will be a principal driver for U.S. open banking adoption in the years ahead.

The Regulatory Environment

In other countries, governments have mandated the creation of open banking standards. Though there are many regulatory bodies in the U.S. banking space, such as the FDIC, there isn’t likely to be a government mandate any time soon for U.S. open banking adoption.

However, the Consumer Financial Protection Bureau is emerging as the regulatory agency that could help shape open banking requirements in the financial services market.

“The CFPB is going to be heavily involved because banks and credit unions are opening up protected consumer financial data to third parties,” Jovanovic said. “The CFPB is going to scrutinize that process and make sure any approach is aligned, centralized, and regulated properly, and centered around consumer rights and protections related to financial data sharing.”

To expand that reach, the CFPB proposed Rule 1033, which addresses personal financial data rights from a consumer standpoint. Though Rule 1033 has yet to be approved, banks and credit unions might have to make significant adjustments to their data management practices, privacy policies and security practices to comply with the new regulation.

In data management, organizations will have to determine the appropriate IT infrastructure to support consumer permissioned data sharing. When consumers give a third party access to their financial data, institutions must have the infrastructure to accept and standardize data sharing across different participants.

Banks and credit unions will also have to determine which privacy policies and security practices should be in place to prevent breaches and unauthorized access.

“Open banking might give financial institutions the chance to broaden their products and services, but it presents an opportunity for fraudsters as well,” Jovanovic said. “Banks and credit unions need to understand how they can deploy the right tools and processes to ensure the consumer has consented and any emerging fraud schemes are managed effectively.”

A Marathon, Not a Sprint

Many banks and credit unions might be tempted to trust the technological aspects of open banking to a third-party partner. However, they must still fully understand the process because the institution is ultimately accountable for compliance.

“Oftentimes, institutions look at compliance as a box to be checked and a cost to be borne,” Wester said. “But the open banking shift is an opportunity for banks and credit unions to rethink their overarching strategy and identify new revenue drivers. It shouldn’t be an onerous task. It’s a way to become more embedded in your customers’ financial lives.”

Though the switch to open banking might be daunting, the model has been implemented successfully elsewhere. In the European Union, open banking was regulated under the Payment Services Directive (PSD), which was subsequently replaced by PSD2.

However, when PSD2 was released, key financial innovations like crypto and blockchain weren’t part of the picture. That is why PSD3 will be implemented, and it will include additional data sharing, standardized APIs, and expanded financial services.

As in the EU, any regulations instituted in the U.S. are likely to evolve to accommodate new innovations, different business models, and niches that haven’t been considered yet. However, just because the regulatory framework might shift is no reason to delay implementation.

“Other open banking ecosystems have evolved in iterations, and they will continue to evolve,” Jovanovic said. “Many banks and credit unions are concerned about open banking, the new regulations, the unfamiliar ways to share data, and about selecting the right technology solutions. But the objective should be to develop a long-term strategy and work it incrementally. It’s a marathon, not a sprint.”

Leveling the Playing Field

Consumers want personalized experiences and services, and open banking offers ways to customize their services and get a consolidated view of their financial information across multiple institutions and providers.

More service providers are involved in the banking system than ever before, which will increase competition and create better products and services for consumers.

“The opportunity for collaboration with new financial players gives banks and credit unions a chance to reinvent the way they serve their customers,” Jovanovic said. “Consumers won’t have to open another account elsewhere, because they can obtain the products and services they need from their primary financial institution. Open banking levels the playing field and creates opportunities for community banks and credit unions to compete with their larger counterparts.”

Scratching the Surface

Though the new model offers a substantial opportunity, the potential for the misuse of consumer data means any new open banking initiatives will face regulatory scrutiny.

“I would emphasize that regulation is coming,” Wester said. “Regulators care about this and they are very serious when it comes to handling consumer data. There may be polarized politics in the U.S., but all sides band together when consumers are victimized and their personal data is exposed.”

Most financial institutions enter customer relationships with the best intentions, but a few wrong moves can taint an organization’s reputation and draw regulatory attention. Third-party partners can help institutions mitigate those risks while giving banks and credit unions full visibility into the process.

Regardless of an organization’s strategy, open banking is gaining momentum. Banks and credit unions should plan accordingly to meet their cardholders’ rising expectations.

“There is still a long way to go, and we’re just scratching the surface,” Jovanovic said. “In the end, it might not matter if consumers understand open banking as a concept. Consumers are after an experience, and as long as they have the freedom to structure that experience, they are going to continue to demand open banking in the future.”

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With regulation directed toward open banking imminent, now is the time for banks to set a strategic vision for their data management. A coherent data management strategy not only addresses compliance issues but also meet customers’ evolving needs in an increasingly data-rich society.

Customers may be uncertain about what open banking entails, but there is still an opportunity for financial institutions to define the process for them. Javelin defines open banking as enabling customers to easily and securely share their bank data with third parties. Given this focus, the first step a bank should take toward open banking is developing a data strategy to serve as a solid foundation.

Unfortunately, much of the conversation has been driven by regulation, leading many financial institutions to be guided primarily by legal considerations.  

“Before open banking starts kicking into high gear, the digital banking folks need to make sure they’re in the room and that the lawyers aren’t running the show just by themselves,” said Dylan Lerner, Senior Analyst of Digital Banking at Javelin Strategy & Research. His new report, Open Banking: A Vision for Customer-Driven Data Management, provides a “3 Cs” framework for bankers to follow as they embark down the road to open banking.

A Customer-Centric Framework

Javelin’s “3 Cs” framework for customer-driven data management outlines a strategy for FIs to develop an open banking approach: centralization, consent, and control.  One challenge banks face today is that customer options are fragmented. They manage marketing opt-outs in one place and privacy preferences in another. “It’s completely unorganized and a mess for customers to deal with,” said Lerner. “The first thing a bank needs to do is centralize all of those options and information.”

A customer’s digital banking experience should feature a central data management hub that consolidates these functions. When changes are needed, there should be one place for customers to manage their connections. Centralization is about making it easy for customers to find what they need.

Consent—specially informed consent—ensures that customers are making their own decisions. A strict policy for “informed consent” transforms transparency into education and understanding, ensuring that terms, conditions, and functionality are not just disclosed but are also presented in clear, understandable language.

Lastly, control is about empowering customers to act on their decisions. Customers gain control through granular permissions, allowing them to share only what they feel is necessary. This means providing not just the controls but also the capability to manage their digital footprint effectively.

“My favorite analogy here is those cookie consent pop-ups,” said Lerner. “You might have seen some of them that will just give you a nuclear option: all cookies or no cookies. We want to change that to something that emphasizes that there’s more going on here. We want to give you the control to say what exactly you want to share.”

Winning the Customers Over

Another important step toward open banking is demonstrating to customers that it serves their best interests. According to Lerner, the best way to generate excitement is showcasing the potential benefits of having all their data in one place.

About half of the top 20 financial institutions are dipping their toes into services like external account aggregation and third-party access oversight and control. A handful of them are advancing further with capabilities such as automated direct deposit switching and card-on-file management.

For instance, Bank of America allows access to a range of information, from student loans to credit scores. Being able to combined all this data to create a comprehensive, value-added service is what will truly engage customers.

Lerner’s report offers examples of how some larger banks are experimenting with new ways to engage their customers. U.S. Bank’s data-access reports, for example, enhance transparency and keep customers informed, while using YouTube videos and other multimedia educational materials to promote accessible learning.

Above all, Lerner emphasizes that financial institutions should not let lawyers dictate the digital banking experience. It’s important to not only meet regulatory requirements but to exceed consumer expectations.

“The compliance requirements and regulations are out there now, but that’s not where a bank needs to start,” Lerner said. “Before we can address those concerns, though, a bank needs to develop a solid data strategy as its foundation for open banking.”

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The United States has been slow to fully embrace the open-banking philosophy, but there are signs the shift is accelerating. As more Americans link their banking, credit, and financial accounts, they expect customizable payments solutions, faster access to funds, and increased control of their financial wellbeing.

Globally, the open-banking market is expected to top $130 billion by 2028, fueled by consumer demand and technological capability. A report from Ripple, Trends in Regional Payments: Inside the Evolving Global Payments Landscape, examines how payments are changing worldwide and the trends driving North American adoption.

Benefits to Open Banking

Third-party companies are at the center of the open-banking model. Banks give approved third-party platforms access to their clients’ accounts, and the platforms can then perform payments and share financial data.

Though Americans have been reluctant to grant access to third-party platforms, the benefits outweigh the risks. Open banking gives businesses and consumers the ability to accept more revenue streams and grant access to more financial products. The model also increases the number of customer touchpoints, which creates the opportunity for personalization.

In many cases, third-party providers can also process transaction data faster. Increased transparency into creditworthiness should make credit scores more accurate, aiding lenders and consumers.

Imminent in North America

Europe has spearheaded the open-banking movement. In the UK, account-to-account (A2A) payments increased by 280% year over year in 2023.  But the United States is trending upward, with 71% of consumers indicating they prefer to make purchases and pay bills from their bank account.

Open-banking solutions gained ground in North America in 2023, exemplified by the partnership between Coinbase and a Canadian A2A infrastructure provider designed to offer alternatives to the traditional banking experience.

The open-banking model keeps banks and fintechs competitive and drives margins down. In turn, that will push traditional banking institutions that dominate the U.S. market to look for alternative ways to boost revenue and cut costs. Open-banking innovations, especially distributed ledger technology, can solve those issues.

Though Americans’ hesitation to adopt open banking has centered on security concerns, third-party platforms are innovating to keep payments safe. Data from the Financial Data Exchange (FDX), a nonprofit organization driving U.S. open-banking adoption, indicated that in 2023 more than 30 million Americans converted from credential-based account access, using IDs and passwords, to tokenized API access.

The FDX believes open banking is imminent in North America because of consumer preferences but also because of a more established regulatory framework. Still, more consumer education is needed. Visa recently reported that 87% of Americans have linked their bank accounts to third-party companies, but only 34% are aware of how the process works.

The Arrival of FedNow

Instant payment rails should also serve to drive the open-banking movement. FedNow, the instant payments service launched by the United States Federal Reserve, gives U.S financial institutions of all sizes the ability to deliver fast, customizable payments services.

Launched in mid-2023, the rail should bolster the awareness and adoption of open banking. That growth should become exponential as more financial institutions understand the service’s benefits.

Accessibility is chief among the advantages. FedNow is available to small businesses, large corporations, and individuals. Real-time rails will make U.S. businesses more competitive because they can operate with the same speed and precision as their global competitors. FedNow also improves the efficiency of payments and settlements.

Because customer expectations will likely increase after they use the service, FedNow should push financial institutions to innovate. Financial flexibility for businesses and consumers will expand as more avenues for revenue are available.

On the downside, financial institutions are likely to feel more pressure to increase spending on tech stacks to meet the demands of solutions like FedNow.

The Universal Language

Because of the complexity involved with connecting global open-banking systems, there must be a universal language that can translate messaging between financial institutions. ISO 20022 is the messaging standard that allows companies to securely share financial information worldwide. It’s an essential tool to support payments modernization and plays a crucial role in facilitating instant payments.

The standard should reduce transaction errors, even in cross-border payments, while making transactions faster and safer. ISO 20022 provides an established, robust common language between businesses and banks that puts a halt to end-of-day batch file payments processing and fully integrates with real-time payments.

ISO 20022 also delivers better analytics, improving financial institutions’ decision-making. Operational efficiencies should improve as companies are able to exchange enhanced remittance information. The standard should also eliminate the need for manual processing, reducing inaccuracies.

The ISO 20022 messaging standard is the foundation for FedNow, but it also offers the payments service the capability to evolve as the payments landscape changes.

What’s In Store for Stablecoins

Stablecoins are digital currencies tied to the value of a fiat currency, such as the U.S. dollar. These types of digital assets allow for direct transactions between customers and merchants, thus reducing transaction fees.

The currency is also cryptographically secure, meaning it is fully predictable and unbiased. Users can settle transactions in near real time without double payments or other settlement issues. Established on distributed ledger technology, stablecoins can serve as a bridge from the traditional Web2 financial model to the innovative Web3 economy.

PayPal made a substantial move into the stablecoin market in 2023, launching its dollar-based stablecoin, PayPal USD (PYUSD), which can be redeemed on a one-for-one basis with U.S. dollars. The new stablecoin makes for speedy and accurate payments, but it also has intriguing applications as a cross-border payment option. The emergence of PYUSD is a milestone that further legitimizes alternative payments and boosts the profile of digital currency.

While there are still regulatory hurdles in store for stablecoins, the backing of fintechs, banks, and governments is speeding the adoption. In the United States, there has been bipartisan support for the Clarity of Payments Stablecoin Act. The legislation is designed to accelerate stablecoin adoption and foster innovation.

Learn more about the changing landscape of payments in North America and beyond.

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The Federal Reserve Bank of Kansas City examined the capability of U.S. depository institutions (DIs), including banks and credit unions, to send and receive instant payments. It found that many banks, particularly smaller ones, will have to modernize their systems or outsource functions to remain competitive.

The main challenge for many banks, according to the report, is that they were not initially structured to accommodate the 24/7 connectivity that instant payments demand. Wire transfers and ACH transactions typically adhere to specific processing hours, and the receiving bank can adjust the timing of transactions throughout the day.

While larger banks can automate the sending and receiving of funds, smaller DIs often rely on manual intervention by personnel during processing payments. While this approach may suffice for banks with lower volumes of wire and ACH payments, it may not be feasible as instant payments gain traction.

The Global Transformation

Though the trend has been slow to catch on in the U.S., instant payments are inevitable. Smaller banks, which likely can’t afford to build the infrastructure to support it, will have to reach out to third-party companies to outsource their instant payments process.

Fintech companies create payment hubs for banks with connectivity to instant payments rails like Real-Time Processing (RTP) and FedNow. However, many banks will also need to outsource customer-facing operations like mobile banking apps, online banking, and B2B payments.

The adoption of front-end solutions has been slow. Though 1,000 DIs had connectivity with FedNow or RTP as of April 2024, many of those institutions only had the ability to receive instant payments. They could not send payments because they did not have appropriate customer-facing solutions.

Losing Market Share

The Kansas City Fed sees core banking providers, or financial technology companies, as an integral player in the shift to open banking and instant payments. But even though fintechs might be the solution for many banks, they could also be the competition.

“As a result of these developments, DIs may collectively lose market share to fintechs; however, the effects on individual DIs may vary,” the Kansas City Fed wrote. “Proactive DIs may sustain or even increase market share by modernizing their core systems, implementing instant payments capabilities, adopting open banking, and sponsoring fintechs and nonbank businesses through BaaS services.”

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Klarna’s entry into the UK’s open banking arena should be seen as an evolutionary move. For a decade now, the Swedish buy now, pay later giant has been trying to elbow its way into the space.

This week, Klarna announced that its UK customers can bypass external card networks and pay directly from their bank accounts. This move offers open banking services to Klarna’s 18 million UK customers and 32,000 retailers, in a country where only five million people are currently using open banking services each month.

Klarna initially got into the open banking space in 2014 through its acquisition of Sofort, a direct bank-to-bank payment service in Germany, which has since expanded to serve several European countries.

In 2022, Klarna introduced a separate brand, Klarna Kosma, as its own open banking arm, only to drop it after less than 18 months. At the time, a Klarna spokesperson said that Klarna Kosma had experienced tremendous growth since its launch back in April 2022. But nevertheless, Klarna decided to shut it down in order to bring it under the flagship corporate umbrella.

This recent launch might be more of a relaunch and strategic realignment rather than a completely new venture. Klarna has already been offering open banking options, such as Pay Now, which is used by 20 million customers globally each month. The company plans to extend similar open banking functionalities for its Pay in 30 and Pay in 3 options later this year.

Taking On the Competition

Many observers have noted that this move positions Klarna to take on Visa and Mastercard in the open banking space. Apple has also been testing open banking features for its UK Apple Wallet users, adding another dimension to the competitive landscape. Additionally, Klarna will be competing with the British government and its GOV.UK Pay service. But as Ben Danner, Senior Analyst for Credit and Commercial at Javelin Strategy & Research, points out, it also is a broadside against the American-based Affirm, one of Klarna’s chief rivals in the buy now, pay later space.

“Being able to pay Klarna directly through a bank account rather than a debit card allows Klarna to bypass the card networks and save on fees,” Danner said. “Direct bank account connection also places Klarna in a better position to compete with Affirm’s physical card product, which already enables consumers to use their linked bank account to pay.” 

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Open banking continues to spread worldwide and is heading for the United States, in what some have been calling its “smartphone moment.” The infrastructure is falling into place to support open banking, and the Consumer Financial Protection Bureau has begun safeguarding the consumer protections necessary for this to happen.

In a recent PaymentsJournal podcast, Amit Shastri, Senior Director of Product Management at Worldpay from FIS, and James Wester, Co-Head of Payments at Javelin Strategy & Research, discussed the various payment rails that will facilitate open banking and what the benefits could be for banks, merchants, and consumers.

The Taxonomy of Open Banking

It’s important to understand the terminologies used in open banking, a new topic for many people. There are key differences between account-to-account (A2A) payments and open banking. A2A payments rely on legacy banking systems and often involve manual user steps, resulting in a suboptimal user experience. Open banking is not limited to the bank’s technology but can be seamlessly integrated into other apps with a stronger focus on conversion rates and experiences. A2A payments tend to lack interoperability across regions, whereas open-banking payments have the potential to be integrated into cross-border payments. In short: Although all open-banking payments are A2A payments, the reverse is not true.

In the United States, open banking is centered on the API-based connectivity that enables the sharing of bank account and balance information. U.S. consumers have become familiar with linking their bank accounts as part of the checkout process, then leveraging that connection to make payments again and again.

The term “real-time payments,” or RTP, refers to the underlying infrastructure that enables instant or near-instant transfer of payments between two parties. RTP operates 24 hours a day, weekends, and bank holidays. Open banking is effectively the overlay of services on these RTP rails, and it has the potential to revolutionize payments for consumers, retailers, small businesses, corporations, and governments. 

Where Open Banking Stands

According to Shastri, open banking accounted for nearly $525 billion of e-commerce transaction value in 2022 and is expected to see a 13% compound annual growth rate through 2026. Some of the key successes of open banking around the world are seen in Brazil, which has a payment scheme driven by the Central Bank of Brazil, and in India with UPI, which was launched in 2016 by the National Payments Corporation of India and the Reserve Bank of India. In India, there were 10 billion open-banking transactions in September 2023 alone. 

If the market and the regulators support it, the potential of open banking worldwide is phenomenal. “The market-led approach that we have in the U.S. works very well for most consumers,” Wester said. “But what we are seeing is recognition that the open-banking model does work better, and that is where we need to be going, regardless of how it’s being led.”

Today’s consumers want improved, innovative shopping experiences, and they want instant gratification. Consumers want greater access to their financial data, and they’re willing to share that if it results in improved services and less costly financial products. Meanwhile, merchants are under extreme pressure to reduce their operational costs. Because open-banking transactions happen outside of traditional card rails like those used by Visa and Mastercard, there are no interchange and scheme fees. Open banking has the potential to save merchants millions of dollars annually. 

“At Worldpay, we do not discriminate between payment methods,” Shastri said. “We offer a plethora of payment methods to our customers because, ultimately, we want to drive financial inclusion. When consumers are successful, businesses are successful, and that’s what we are striving for every day.” 

Open banking is proliferating around the world, but it’s just getting off the ground in the United States. Shastri explained that there are four U.S. rails upon which to build an open-banking ecosystem: 

• ACH has been the fundamental backbone of money movement since the 1970s. These payment methods are not real time, however; they are processed in batches. The cost of these payments is low and therefore a very effective choice for large-scale, repetitive transactions, but they typically take from one to three business days to settle. 

• The RTP Network was set up in 2017 and is governed by The Clearing House. According to The Clearing House, about 60% to 70% of U.S. consumers can send RTP payments, but more than 80% receive an RTP payment. 

• Wires are fundamentally used for high-value, cross-border, and urgent domestic transfers. They typically facilitate funds between banks and financial institutions and incur higher fees compared with RTP and ACH.

• FedNow is the newest real-time U.S. payment rail, live as of July 2023, with more than a hundred participating financial institutions and payment service providers. 

“For a payment method to be successful, it needs to reach the broadest possible consumer base,” Shastri said. “Shoppers don’t really care about RTP or ACH or FedNow. It’s for us as a payment service provider to solve that complexity for consumers and merchants, so that they have the broadest possible reach of the payment method in the country.” 

Perhaps the biggest challenge in this space is bank fragmentation. The United States has more than 12,000 banks, whereas countries like Canada are in the double digits. The legacy banking system that supports smaller financial institutions is not equipped to support real-time and clean data-sharing capabilities. 

Because no standards have been set, each bank can enable the sharing of data or enable payments in a slightly different way. “We could have tens of thousands of potential ways to connect to the bank account,” Shastri said. “The cost of integrating, managing, and maintaining these API integrations will be significant for the players in this space.”

Data Privacy Issues

With open banking, consumers are the ultimate owners of their financial data and can choose to share it with whomever they choose. But this leads to legal and ethical implications around sharing data with multiple third-party providers. “As an industry, we need to solve for some of these legal initial implications and assuage any concerns from a legal and ethical standpoint,” Shastri said. 

The legal basis of open banking flows from Section 1033 of the Dodd-Frank Act, which requires banks to make this data available to the consumer in a usable format. Earlier this year, the CFPB issued a notice of proposed rulemaking to allow consumers to have control over their financial lives and gain new protections against companies’ misuse of data. Consumers’ own data would be made available to them at no charge through digital interfaces that are safe, secure, and reliable. They would also have the legal right to share their data with whomever they choose and revoke their access to data as well. 

“This is the core basis for open-banking adoption in the U.S.,” Shastri said. “CFPB is doing a phenomenal job of regulating the space, making sure the ecosystem players behave and play by the rules while protecting consumers from malicious practices and data security.” 

‘The Smartphone Moment’

Shastri expects to see action around the fragmentation of APIs, with common standards for the interfaces being adopted at least at a country level. That will be closely also aligned through the ISO 20022 messaging standard to improve the insights through data and conversion rates. 

“To me, this is like the smartphone moment of financial services,” Shastri said. “This is the start of the journey of building innovative products using data. Open banking will become more and more feature-rich. There is already work going on around variable recurring payments, which will enable person-to-business use cases across a number of industries. 

“Open banking is not just about sharing your banking data but sharing all your financial data, including mortgage, savings, and pension. We could even add other nonfinancial data, like your utility consumption or your Internet of Things data sources. Not just in the United States, but around the world, we will enable our merchants with tools that they need to create value for their consumers. We will create a better, financially inclusive ecosystem where everybody wins.”

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The Consumer Financial Protection Bureau (CFPB) has proposed a new rule that will enable customers to freely share their financial information with third-party financial service providers.

The rule prohibits financial institutions from stockpiling their customers’ personal data and  mandates that companies release this information if the customer requests it. Essentially, at the very core, the CFPB is looking to protect consumer data and put more control back in their hands.  

Companies that receive consumer financial data are forbidden from misusing or monetizing this information. Consumers are also free to leave a bank if they are receiving bad service. 

“With the right consumer protections in place, a shift toward open and decentralized banking can supercharge competition, improve financial products and services, and discourage junk fees,” said CFPB Director Rohit Chopra in a prepared statement. “Today, we are proposing a rule to give consumers the power to walk away from bad service and choose the financial institutions that offer the best products and prices.”

Open Banking and Consumer Data

Open banking gives third-party financial service providers access to data from consumer banking and transactions, derived from both banks and non-bank financial institutions.

Open banking regulations can be traced back to the European Union in 2015. Since then, many countries, including Australia, Brazil, and the United Arab Emirates, have moved forward in adopting open banking regulations.

Although open banking can transform the financial system, protecting personal data has been tricky. With personal data accumulating, being stored in various places by various companies, data is now more susceptible to risk.

According to James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, having “data silos and fragmented security measures is unsustainable.” As more companies fear the potential liabilities for data breaches or the mismanagement of customer data, now is the time for them to look into a more secure data management strategy—including multi-factor authentication, role-based access control, and encryption.

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Businesses are becoming keenly aware that offering a variety of payment methods for their customers is essential to remaining competitive in the digitally evolving market. Consumers want the choice to pay in a way that is convenient, secure, and efficient. Not offering their preferred form of payment could prompt them to take their business elsewhere.

Mastercard and J.P. Morgan Chase have addressed the importance of the customer payment experience by launching a pay-by-bank solution that enables billers to let customers pay their bills through their bank accounts.

With pay-by-bank, customers can now pay for recurring payments such as insurance, healthcare, utilities, rent, and tuition. Billers, whose customers are already using ACH to pay for their bills, can easily enable the pay-by-bank solution on their payments page. Customers simply must choose “pay-by-bank.” Then they will be asked to choose their bank and allow their bank information to be securely shared via Mastercard’s open-banking platform.

“This innovative payment option aligns with our commitment to providing our customers with convenient and secure payment choices,” Darrell Conn, Executive Director of Verizon, said in a prepared statement.

“We believe that Pay-by-bank will enhance the overall customer experience, making it easier and more efficient for our customers to pay their bills. We look forward to this partnership with J.P. Morgan and Mastercard to bring more innovative solutions to our customers.”   

Pay-by-Bank Growing in Popularity

Pay-by-bank is increasingly preferred by merchants across the country as it reduces payment processing costs, as there are no swipe fees. And with inflation, high interest rates, and other economic factors negatively affecting the average consumer, more are turning away from credit card purchases and opting for debit cards and pay-by-bank at checkout.

Amid the current economic conditions, expect pay-by-bank to continue to gain ground as a payment method. It is likely that it will join the ranks of other current interest-free methods of payment, such as debit cards and cash.

“The JP Morgan-Mastercard pay-by-bank launch reiterates the growing interest and demand for direct-debit and open-banking solutions in the U.S.,” said Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research. “It’s not surprising that Verizon is piloting the solution, especially given AT&T, T-Mobile, and Verizon have all been pushing customers to set up autopay with lower-cost debit cards and ACH payments. Verizon was also one of the first merchants to allow its customers to make instant bill payments via RTP and Citi.

“Many recent developments, including the CFPB’s proposed Personal Financial Data Rights rule, the Fed potentially lowering the debit fee cap, and the possibility of credit card fee regulation, could have a significant impact on the U.S. payments landscape. Additionally, growing real-time payment adoption could enhance pay-by-bank solutions and generate new revenue opportunities.”

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Mastercard is betting big on open banking, working with leading players in the space—including Worldpay from FIS—to provide consumers and small businesses with the ability to authorize trusted entities access to their financial information.

Through its collaboration with Worldpay, consumers can facilitate direct bill payments from their bank accounts and authorize the sharing of their data—without it being stores—between trusted parties. Mastercard is also working with J.P. Morgan Payments on a pay-by-bank solution that leverages its open banking technology to simplify bill payments.

“Open banking solutions can speed up the lending process so consumers and SMEs are able to get quick access to funds they need and get back to running their businesses and completing purchases,” said Daniel Keyes, senior analyst at Javelin Strategy & Research. “It’s particularly important that SMEs and consumers are only given funds that they’re in a position to pay back, and open banking can help make sure underwriters have access to the financial information needed so neither ends up overextended.”

Trust is Fundamental

According to the company, trust is a vital component of open banking, and Mastercard is particularly keen on safeguarding consumer data.

“We’ve been in the data space for a very long time, so we have a very high bar on compliance, security, safety,” said Jess Turner, EVP, Head of Global Open Banking and API at Mastercard. “Even in the way we transmit things and how we use data, that’s a core focus of ours. And so we put a lot of energy into digital identification and into fraud reduction.”

“What we do with open banking is we embed those assets into the data flow,” she said. “When we talk about open banking, we talk about connecting to a bank’s APIs. And that is the most secure way to move data. When you bring these assets together, you have an ability to have consumer consented data with clear transparency for what they’re using it for.”

Tackling Fraud

Last year, consumers in the U.S. and Canada experienced $3.2 billion in losses from fraudulent opened accounts.

“That’s a lot from opening fraudulent accounts,” Turner said. “If that happens, and you’re a victim of that, you’re not going to try it again next time.”

“Consumers and small business own their data, and they should have access to it—and it needs to be protected. Everything we build around that is to support those policies and principles. We also believe that you should not be bias in the data, and it should be used in a clean and concise way,” she said. “That’s really important, because with that, we have boards across Mastercard that check all of the data products we have—whether it’s a new model, whether it’s an attribute to make sure we’re following our data principles and how it’s leveraged, and then to, to make sure there’s no bias in it. We take it very seriously.

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UK startup BuildMyCreditScore is leveraging open banking technology to let consumers boost their credit scores.

The company is offering consumers a Mastercard debit card that can be integrated within their current bank account, and consumers are encouraged to make purchases like they normally would. Finextra, which reported on the recent news noted:

“While the debit card works instantly like a regular bank card, the money—up to a daily cap of £30 per day—is collected via Direct Debit by BuildMyCreditScore around two working days after, allowing it to be reported to credit reference agencies. As a result, cardholders are able to build their credit score by demonstrating their ability to manage rolling outgoings and repay credit promptly.”

Boosting Credit

The primary advantage of this approach is that it empowers cardholders to strengthen their credit scores by showcasing their capacity to effectively handle continuous expense and swiftly settle any credit debts. Rather than depending on conventional credit-building offerings—which frequently entail obtaining credit and ensuring timely repayments—BuildMyCreditScore’s solution incorporates itself into an individual’s everyday spending patterns.   

According to Finextra, the company conducted a pilot program where it tested the credit building approach with 632 consumers between Dec. 2022 and June 2023. It found that most participants experienced a notable improvement in their credit scores within the first three months. In fact, score increases ranged from 11 to 55 points.

In a prepared statement, James Lynn, CEO and Co-Founder of BuildMyCreditScore, noted:

“Traditional credit builder products typically rely on someone making prompt repayments on credit they’ve taken out. If they fail to do so for any reason, they risk falling into debt and harming their credit score further. BuildMyCreditScore’s innovative use of open banking disrupts this model by integrating seamlessly with a person’s usual spending habits, allowing them to build their credit score in a safe, low-risk way through their everyday spending.”

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