Gone are the days of payments passing from acquirer to issuer to customer and back again like a relay stick moving around a track with snails as carriers. Say hello to pre-approved risk profiles and customers determining which and how much data is shared with whom. But let’s not get ahead of ourselves. What is open banking, and why does it matter?
What is open banking?
Open banking amounts to open data. It’s a banking practice that provides third-party financial service providers and applications with open access to consumer banking, transaction and other financial data from banks and non-financial institutions. That’s quite a mouthful. Let’s break it down.
Financial institutions like banks have basically opened the door to their customers’ financial data to third parties like fintech companies and third-party providers. A customer ticks a box to allow their bank to share their private data. Third parties can then use this data to compare customers’ transaction histories to various financial products. They can then aggregate the data across different financial institutions to create customer profiles and recommend, or even create, new products for those customers.
But why would somebody do this? Wouldn’t it open one up to all sorts of scams? And wouldn’t that compromise the data and customer privacy?
There are various benefits to open banking. It will force large, established banks to be more competitive with smaller players in the industry. Customers will receive better service and products from various providers.
Some of the main concerns with open banking are that it opens up data to malicious threats and online payment fraud. Open banking might also open up private data to hacking and insider threats.
Mastercard’s new open banking payment tools
According to a study Mastercard conducted on The Rise of Open Banking in the US, 80% of consumers and 90% of younger consumers are connecting their bank accounts to technology apps to provide them with services they want and need. The study found there is a marked shift to digital banking. Consumers use apps to send money to friends and family, refinance loans, crowdfund and trade cryptocurrencies.
It makes sense that Mastercard would use open banking to roll out payment tools for merchants. They recently announced a pair of open banking tools designed to improve predictability and transparency in digital account-to-account payments for merchants.
Both the Payment Success Indicator and the Payment Routing Optimiser use data analytics and machine learning to make the payment experience safer and smarter.
The Payment Success Indicator lets the payment originator – a merchant, bank, service provider or digital wallet – assess a consumer’s historical behaviour and risk patterns for each transaction.
The Payment Routing Optimiser takes this data, interprets and scores it and then recommends the optimal day and payment rail i.e. Same day, Next day etc. taking into account the cost, speed and risk associated with the transaction.
The tools will be generally available later in the year but Mastercard has signed up the Bilt Rewards Alliance, a collection of more than two million rental homes across the US that lets renters earn points by paying rent, as one of the first partners to launch Payment Success Indicator.
Ankur Jain, CEO of Bilt Rewards, says: “Payment Success Indicator should significantly reduce the potential for returned payments, delivering a digital payment experience that works harder and smarter for everyone.”
The development of open banking solutions by major payment providers opens up a world of fewer chargebacks for merchants and hopefully lower risk for issuing and acquiring banks.
If you want to talk about data privacy, compliance and providers that iterate faster than anybody else to provide merchants with exceptional products and client service, speak to Truevo. Better still, if you’re in London around 26 and 27 April visit us at the Retail Technology Show (RTS) at stand no: 6E80. Let’s talk payments.
If you’d like to book a private session to talk about your needs, please register at Truevo’s RTS page. We can’t wait to share our knowledge, products and a cup of coffee with you.
