Europe’s open banking approaches U.S. shores
Since its inception, the payments journey has been marked by technology migrations flowing back and forth across geographic regions. As early deployers of EMV cards, Europeans modeled the way for adoption of highly secure chip-and-PIN and contactless digital payments well before the United States began migrating from mag stripe to EMV and contactless payment schemes. Europe’s example helped U.S. payments industry stakeholders avoid pitfalls in EMV migration and hasten their participation in an increasingly global, interoperable commerce ecosystem.
As attention turns to making payments more agile, transparent and frictionless, U.S. financial institutions are once again taking a cue from European counterparts as they navigate changing regulatory currents. This article shares insights from industry leaders on how banking trends that originated in Europe may impact U.S. financial services and possibly challenge deeply held assumptions about currencies and banking.
Global banking’s mosaic
In August 2020, Peter Gordon, head of enterprise money movement at U.S. Bank, led a Zelle workshop at the MPC Digital Commerce conference. As he introduced Zelle, he characterized the growing network of bank and credit unions as a commercially driven approach to peer-to-peer payments (P2P), bill payments and bank-to-bank accounts.
“We hope that having this fabric of so many different companies, [including] large banks, small banks and credit unions, participate in the ecosystem that the mosaic will make our banking and payment systems resilient and truly unique across the globe,” Gordon said.
Fellow MPC panelist Lou Anne Alexander, chief product officer at Early Warning Services LLC, agreed with Gordon that U.S. adoption of P2P and faster payments, while slow, has the potential to bring lasting benefits to banks and their B2B and B2C customers. She also observed that during the pandemic, first-time digital bankers were surprised by the ease and elegance of digital banking.
“We’ve seen this drastic acceleration of customers saying that they have changed their banking habits,” Alexander said. “Many bank branches were closed; they couldn’t bank in the same way. Customers who never relied on online or mobile banking or used remote deposit capture, are liking those channels and saying this is how I will bank in the future.”
Jeremy Nicholds, chief executive officer at London-based Judopay, agreed that people who rushed to digital banking out of necessity during the COVID pandemic quickly recognized its benefits. “More businesses are interested in going digital, and consumers are trusting these solutions more,” he said. “You have the stage set for creating consumer-focused solutions and enhancing what’s already there.”
Nicholds described Judopay as a tech company and digital commerce enabler that helps clients have a better experience across in-person, in-app and mobile commerce channels. The UK-based firm leverages open banking among fintechs, third parties and financial institutions to accelerate payment flows, share data and help service providers add value to customer relationships. For example, Chip, a Judopay client, created an app that plugs into a consumer’s bank account and initiates what Nicholds described as “subliminal savings.”
“Chip uses algorithms to analyze expenditure patterns, save money for users and get them better returns,” Nicholds said. “Users grant permission, save money and decide what they want to do with it. That’s a good example of open banking and the kind of client we’re supporting.”
Nicholds further noted that Europe has a long history of regulator-led initiatives, and a number that have come from the European Commission are working their way through to eventually become law. For example, the second payment directive (PSD2) came from the European Commission and was passed into law by the European Parliament.
“It sometimes takes a while to pass legislation,” Nicholds said. “Some countries are quite speedy; others take more time. The European focus has centered on the overall commerce ecosystem and market, trying to make it as open as possible while ensuring against anti-competitive behaviors.”
Nicholds has seen European lobbyists attempt to make commerce more secure. This principle is the basis for strong customer authentication and a key component of PSD2, which was devised to address the need for enhanced authentication after fraudsters shifted from card-present to digital commerce following EMV and digital commerce migrations, he added.
As part of their efforts to invigorate the market and encourage competition, European regulators are encouraging fintechs and other new players to join the payments ecosystem. They have also created two new open banking categories: the account information service provider (AISP) and the payment initiation service provider (PISP). These regulated entities facilitate secure initiations and retrievals between open banking providers. End users have a right to understand the specific data that AISPs and PISPs share and with whom and for how long they share the data. These requirements fall under Europe’s General Data Protection Regulation (GDPR), which became law in May 2018.
Changing currents, currencies
As he reflected on global efforts to improve payment flows, Nicholds suggested that the current system is not broken; payments industry stakeholders are just trying to build a stronger, more united ecosystem. According to Nicholds, the world of payments in which we’ve been living has been dominated by big international card brands, which are brilliant and, from a consumer point of view, they just work, which is a great value. Then you have open banking and digital currencies that broaden our choices and give us different ways of doing things, he added.
Jennifer Mitrenga, head of Americas, Provenance at Figure Technologies Inc., discussed cryptocurrency and blockchain technology features and benefits in a Jan. 21, 2021, panel hosted by NYC FinTech Women and sponsored by Shearman & Sterling LLP.
“The beauty behind bitcoin is the technology, which is blockchain, and its implications have massive addressable market opportunities,” Mitrenga said. She summarized the three benefits of blockchain technology as follows:
- Distributed database: A distributed database enables multiple financial institutions to validate a single account balance. Today we rely on an API or an interface to tell us an account balance, but it’s not truly distributed or accountable.
- Immutable ledger: An immutable database allows you to see changes or edits that are completely accurate, real-time and fully transparent. This enables people all over the world to interact without paying third party-intermediary costs.
- Trustless nature: Today, hundreds of billions of dollars go to intermediaries who say Party A and Party B don’t trust each other, so let’s pay them to do that. Having an immutable ledger with smart contracts on the blockchain replaces this type of trust with code.
“These three exciting features reflect the beauty behind bitcoin and digital assets and what that technology can do across a number of sectors,” Mitrenga said.
Nicholds pointed out that the ultimate aim is improving the customer experience. “Consumers are looking for easy, convenient safe, secure, fast payments,” he said. “Whether it’s open banking or a digital dollar, the objective of all these initiatives is to give people a better experience and that’s what we will expect from payments going forward.”
This article originally appeared February 8, 2021, in The Green Sheet: http://www.greensheet.com/emagazine.php?article_id=6541
Dale S. Laszig, vice president, content marketing at Mobile Marketing & Technology and managing director, DSL Direct, is a payments industry journalist and content strategist who writes for multiple trade journals. Follow her on LinkedIn at https://www.linkedin.com/in/dalelaszig/ and @DSLdirect on Twitter.