Europe's open banking is leaving the US in the dust
Open banking payments are already a fact of life in Europe. In the US, not so much. But new infrastructure and the right approach could lead to a sea change stateside.
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At this point, you’ve probably heard the conventional wisdom about open banking in the US.
It’s a classic tortoise-and-hare tale. The EU is the hare that bolted from the starting line and maintained a rapid pace ever since. That’s left the US playing the tortoise, consistently lagging behind.
If it all sounds like a bit of a fable, rest assured this one’s mostly true. Europe is still streets ahead in terms of adoption. Spurred on by regulatory mandates and robust ecosystems, Europe hit 12.2m open banking users in 2020. That’s nearly half of all global users.
Europe is still streets ahead in terms of adoption. Spurred on by regulatory mandates and robust ecosystems, Europe hit 12.2m open banking users in 2020.
And innovation has largely kept up. Open banking in Europe isn’t just about data anymore. It’s about using APIs and data to facilitate secure, friction-free payments that settle almost instantly. The potential is dizzying.
Compare that to the situation in America. Most open banking applications just revolve around financial data. A lack of regulation and standardisation has made it much harder to introduce the kinds of data-rich open banking payments we see in Europe.
Here’s the thing, though: the race isn’t over. The US is behind on open banking payments, but they have the potential to make up ground very quickly. With FedNow set to launch in 2023, we could see a rush of payment innovation from American firms. Open banking has a big role to play in making that happen. Don’t count the tortoise out just yet.
So what’s standing in the way of America embracing open banking? And what can US firms learn from Europe?
Innovation without regulation
Let’s start on the regulatory side. Unlike in the US, open banking is legally entrenched in the EU. Under PSD2, customers can give approved third parties access to their financial accounts to collect data and initiate payments through APIs. If the consent is there, banks have to allow it.
PSD2 was the big bang for open banking in Europe. It didn’t mandate specific technical standards, but APIs like XS2A, STET and PolishAPI emerged soon after to standardise access.
Critically, European standards and regulations opened the door for open banking payments — a much riskier proposition to recreate with screen scraping (more on that in second). The end result: a host of challenger companies that leveraged open banking to offer innovative new products.
Those rules don’t exist in the US. Instead of growing outward from a regulatory regime, open banking in the US has evolved through a market-led approach. As a result, progress has been piecemeal, with no set rules on how third parties connect to accounts or how consumers should be protected.
Banks also aren’t obligated to give access through APIs, which leaves fintechs in a bind. Either they access the APIs of many banks and consortiums individually, or they rely on screen scraping, using customer login credentials to access their data. Needless to say, the latter’s not the most secure way of doing things.
A lack of easy access has played a big part in slowing down open banking stateside. And while the White House passed an executive order to make customer data more portable last year, there’s no law on the books with the scale and scope of something like PSD2.
So without a regulatory mandate, how can US firms open things up? Ultimately, it’s a matter of incentivising access. Banks won’t pursue open banking unless it’s in their commercial interest. And maintaining the infrastructure involved carries its own costs.
So without a regulatory mandate, how can US firms open things up? Ultimately, it’s a matter of incentivising access.
Coordination between banks can also lessen the load for everyone. By working together, financial institutions can split the cost without sacrificing innovation.
Progress in a fragmented market
Of course, the right incentives alone won’t make unified, API-based open banking a reality in the US. That’s a tricky feat in such a big country.
Again, the EU has an advantage here. Banking is generally more concentrated in European countries, which made it easier to establish a systemised open banking framework. On average, the top five banks in the EU countries hold about 67% of all assets. In some places, they can hold up to 97% of market share.
Compare that with the US, the home of more than 4,200 banks. Even if you’re JPMorgan Chase, you’re still holding less than 12% of all domestic deposits. Capturing such a fragmented market was always going to be a big ask.
The good news is that widespread adoption of open banking payments is still possible. Consortiums like the Financial Data Exchange (FDX) are already working to create a common standard that banks can follow when building their APIs. Already, the FDX allows 200 banks and fintechs to exchange data. This valuable groundwork could be a lifeline for open banking payments down the road.
And as Americans become more aware of instant payments, expect demand to rise. Already, more than 45% of Americans have experienced instant payments through infrastructure like the Automated Clearing House’s RTP network, and business interest for real-time transactions remains high. The excitement will only build with FedNow’s launch.
Once these instant payment rails are in place, open banking will be able to step into the spotlight. Already, this infrastructure is facilitating instant, data-rich payments in much of Europe. Soon, Americans could experience the benefits for themselves.
My unfiltered opinion
With the right incentives and the necessary infrastructure, open banking payments will make their way to the US very soon. Harnessing the speed of real-time payment rails, they’ll offer an instant, frictionless experience that will challenge the dominance of even entrenched methods like cards.
We’ve already seen promising open banking adoption in Europe. Halfway around the world, it’s only a matter of time.