- Europe is likely to retain open banking’s largest market share, supported by incoming Payment Services Directive regulation
- The UK offers successful examples for open banking use cases, as its industry bodies continue working to make payments safer and more frictionless
- A focus on building consumer trust can speed up the open banking adoption curve and enable more use cases
The adoption of the third iteration of the Payment Services Directive may be seen in 2025, which — among other changes — looks to improve the framework for open banking, a market which is expected to continue growing exponentially and exceed $31bn in 2024, up from $24.67bn in 2023.
Driven by demand for fast and real-time fund transfers and the expansion of digital banking services, the Open Banking Global Market Report 2024 predicts that the open banking market will grow to $75.4bn in 2028 at a compound annual growth rate of nearly 25 per cent.
Open banking users are expected to exceed 100 million this year, with Europe holding the largest market share, and incoming PSD3 regulation likely to boost it further.
Still, open banking holds just a fraction of total business and consumer payments. To fully harness open banking, payment providers must adopt alternative payment methods and build consumer trust, according to Tareq Shaheen, director of payment solutions at Eastnets, a global provider of compliance and payment solutions.
Trust and security
With industry focus increasingly on banking-as-a-service, variable recurring payments and consumer personalisation, open banking use cases will increase and drive industry adoption.
To speed up the adoption curve, the “starting point” lies with consumers and building trust, according to Bart Willaert, Mastercard’s executive vice-president for open banking international markets. With established security and trust in open banking, use cases can follow, says Willaert.
Following a process of standardisation, the industry has learned “what worked and what didn’t work” to improve the quality of the open banking network with capabilities to scale at mass, says Willaert.
With more regulation on the horizon, the expansion of use cases is critical to open banking’s growth, he adds. “The UK has had a successful take-up of consumers using open banking to pay off credit cards, pay bills, or to top up accounts. These are the types of use cases that we see as scaling and becoming ingrained in open banking.”
More use cases regarding lending and credit decisioning can be expected, with the opportunity to use the broadest set of data available — with consumer consent — for more frictionless lending and credit decisioning, says Willaert.
Europe’s incoming PSD3
The Revised Payment Services Directive (PSD2) aimed to create a more integrated European payments market, making payments more secure and protecting consumers. On June 28 2023, the European Commission published proposals for a third Payment Services Directive (PSD3) and a Payment Services Regulation (EU PSR).
PSD3 is a natural extension of PSD2, says Shaheen, but there are key focuses on fraud prevention in the revised regulation.
“One focus is collaboration between different financial institutions and fintechs on fraud; with PSD3, there will be the legal framework for the exchange of fraud-related data,” says Shaheen.
To mitigate payment fraud, PSD3 enables payment service providers to share fraud-related information, increasing consumer awareness and strengthening customer authentication rules.
It also emphasises “liability aspects” with increased customer refund rights, says Shaheen. “The liability has been shifted towards the financial institutions. In some fraudulent cases, financial institutions will be required to refund customers.”
Collaboration between banks, fintechs and wider industry participants is key to mitigating fraud, says Shaheen, adding that PSD3 could be improved with a larger mandate regarding the sharing of fraudulent data.
“There is the legal framework, but it is still predominantly a voluntary requirement. I would like to see something clearer on this.”
“By the time we reach the real implementation and application of PSD3, there will be new patterns of fraud. In the same way that fraudsters are collaborating in their attacks, it makes sense that legitimate players actively collaborate together,” adds Shaheen.
Still, regulation alone is not going to drive the market forward; more use cases are needed, says Willaert. Meanwhile, PSD3 is a positive “next stage in the maturity of the open banking ecosystem”.
Driving adoption in the UK
January 2024 marked six years of open banking in the UK, when it became one of the first countries in the world to begin capitalising on the value of financial data for consumers and small businesses.
UK legislation on open banking remains based on PSD2 and the CMA order, with Europe’s revised proposals not affecting the UK, according to Phillip Mind, director of digital technology and innovation at trade association UK Finance.
The Treasury has since initiated a review of 2017’s Payment Services Regulations which transposed PSD2. “We don’t know the outcome yet, but the Treasury has alluded to the fact that it will adjust the legislative framework of open banking,” says Mind.
As such, UK regulators are developing more use cases and considering how to open up single immediate payments to viable recurring payments. “These use cases will increase, which will offer more opportunity to leverage open banking,” says Willaert.
UK Finance is working with the industry to make open banking payments safer and more frictionless through the use of transaction risk indicators, which will help banks who are receiving open banking initiated payments to process them more safely, says Mind.
Given the UK’s large subscription economy — whether through direct debit card or cards on file — in the future, variable recurring payments could be the way forward, says Mind. “This would offer all sorts of opportunities for merchants because it gives them another way of receiving regular payments, and it gives customers another way of making regular payments, introducing choice and competition.”
UK Finance views variable recurring payments as a strong “test case” for commercial banking, adds Mind. “There’s a big concept of commercially sustainable open banking — this could start with variable recurring payments.”
Such payments could “turn the dial” for consumer growth and open banking adoption in the UK, he adds.
