Open Banking in Payment Initiation Services:
One of the ways to disrupt the entrenched system where big tech is building walled gardens and old guard are tough to budge.
I’ve decided to publish my edited notes I prepared for the FDATA Summit panel that I participated in — and enjoyed while learning from prominent practitioners in Edinburgh this week.
PANEL TWELVE: Payments: A challenge to card schemes for a tool to facilitate OF
• Alan Ainsworth, Chair (UK) – Head of Policy, OBIE
• Daniel Gusev (RU) – Managing Partner, Gauss Ventures
• David Heron (UK) – Standards Authority, PayUK
• Ralf Olhausen (GER) -
• Samantha Seaton (UK) – CEO, Moneyhub Enterprise
• Sam Taussig (US) – Global Head of Policy, Kabbage
The panel kicked off with the chair asking each panel member as to “why do we need Open Banking (or PIS) payments?” and the answer is no simple at all. It very much depends on who proposes this question: from the eyes of the user the pre-fintech era was very inefficient with users locked in bundled unintuitive accounts with penalties for overdrafts with no alerts, bundled insurance for what users seldom needed, slow movement of fund, high fees etc.
From the eyes of new players born after the quantitative easening began, this is the perfect moment to take more turf from incumbents and buy market share by swift expansion funded by investors cheap capital.
Open banking and open data favours the latter road to open up the old world. It gives users access to a variety of payment services with better or overall transparent pricing and without lock-in traps — that being important for equitable development of national economies.
From a perspective of an incumbent that have been bestowed a natural monopoly of branches and footfall and the scale of operations it entails, it might not be the best way moving forward. Precisely for this, incumbents often lobby for conflicting ends, pushing for complex APIs while they negotiate digitization projects to use the same APIs and rebuild their proposition from beyond.
It was mentioned at the conference the road to open banking even in the UK started with Midata and took 5 years to a near dead-end before by mandate a group of 9 major banks joined to develop a technical specification for an agreed set of APIs: starting from account information and slowly proceeding to payment initiation.
Another way: its beauty and the danger it represents
While some banks bicker as to what API call to use to both enable resilience while maintaining stability and supporting liquidity — major tech platforms are building walled garden of services enabling the same and even more audacious services. Buoyed by green-field, state support and lack of prior experience and habits of users — they form new experiences closely tied to the needs of the merchants.
One need to retrace the origins of transactions with people relying on cashless payments in 16th century Florence because of the trust they had with bankers and merchants who ran private tabs. Tokens of exchange were needed for tax payments, times of war and long-distance trade where trust had to be converted into private or public notes.
The same evolution happened in the 1950ies with charge cards and then credit cards where a unified token of exchange took friction out of consumption. Each revolution followed the same routine: enabling choice, decreasing friction, lowering intermediation cost, providing ability to buy on credit.
There is no exception this time: it’s just that through the layers of abstraction since banking killed the personal approach and automated itself, it also lost the ability to sense the needs of businesses.
Today CNP and CP transactions are one. Regulation of payment rates mandate for identifying new stable sources of revenue, as well as soul searching for what a payment system is for a consumer. Where profits are done for on the payment side and that creates need for cost efficiency and we witness M&A in the payment processing space, it also identifies new ways to earn money: by looking at the same rulebook that goes back centuries.
Coupling VAS with established core competences around redundancy, scalability, security. One question remains for me whether payment systems still want a walled garden and prefer buying startups rather than partnering them and whether acquisition drive is mandated by the need for proper standards. Whether standards can be debated and enforced by the market and whether payment systems want to follow them rather than to maintain their own game?