Application of open banking in e-commerce

Imagine a world where eCommerce payments are not only faster, but also cheaper and more secure – this is the promise of open banking.

Open banking has the potential to revolutionize the way we make and accept payments. By its very nature, its ability to work well and integrate with other financial systems can simplify lengthy processes and reduce transaction costs. This is a clear win for e-commerce companies looking to improve the customer experience while keeping costs as low as possible.

However, despite the great potential of Open Banking, it has not yet achieved the level of stability and reliability that enterprises expect.

There are a number of key challenges that need to be addressed, including the need for clear guidance on user protection and the handling of refunds, as well as the need for better communication and transparency around open banking for consumers to understand the benefits and be fully educated on the type of data they they share and with whom.

Last week at the Payment Leaders Summit Europe, I joined a panel of experts to discuss the challenges of open banking and how the industry needs to work together to address them.

We discussed many interesting topics, but the most important were three conclusions:

The potential of Open Banking is great, but stability and reliability need to be improved

Unlike the 24/7 reliability of card payments, Open Banking systems suffer from instability and inconsistent supplier performance. To reach its full potential, Open Banking must offer the same level of reliability that businesses expect from traditional payment methods.

The main challenge to achieving stability is the lack of consistent standards across regions. This inconsistency makes it difficult for global financial institutions to create a unified strategy, forcing providers to deal with a confusing mix of regulations and practices. As a result, many providers are creating their own rules on the fly, leading to greater confusion and inconsistency in the Open Banking system.

The UK has set a strong example with its open banking framework, which ensures API reliability and strong consumer protection. For the rest of Europe to keep pace, banks need to be encouraged to improve their API infrastructure.

Market support can help drive this innovation, but without harmonized regulations, scaling open banking across regions will remain difficult. Collaboration between regulators, fintech companies and financial institutions is essential to overcome these barriers and create a consistent, reliable payments infrastructure.

User protection, refund handling and fraud prevention need to be improved

For open banking to gain wider acceptance and adoption, issues such as user protection, refund handling and fraud prevention need to be addressed. Open Banking payments often take place in real time and use payment rails such as Faster Payments (FPS) in the UK and SEPA Instant in the EU. Originally designed for peer-to-peer transactions, these systems lack the consumer protection mechanisms found in traditional card payments.

Before Open Banking, FPS was mainly used in a retail context to make payments to friends and family. Open banking means FPS is now used every day to pay individuals, businesses and governments.

To make open banking more relevant to consumer-to-business transactions, targeted efforts need to be made to improve these payment rails. This includes developing better consumer protection and dispute resolution features. By working together, regulators, banks and payment service providers (PSPs) can create a secure, reliable infrastructure that supports the unique needs of B2C transactions.

Simplifying the consumer experience is key to adoption

For open banking to truly take off, the consumer experience must be simplified. Unlike widely recognized brands such as Visa and Mastercard, Open Banking services have inconsistent branding and messaging, leading to consumer confusion. The emphasis should be on ensuring transparency – making the payment process easy to understand and building trust through familiar, user-friendly methods.

Gaining consumer awareness and trust remains significant barriers. Many people are either unaware of Open Banking or are hesitant to join due to data security concerns. To build trust, banks and fintech companies must prioritize education and transparency. Simplifying the message about open banking and ensuring consumers clearly understand its benefits is key to achieving the solution. Additionally, education about how data is used and its benefits can help reduce confusion and increase consumer confidence in using Open Banking services.

Potential waiting to be unlocked

The introduction of open banking changed the rules of the game. It has the ability to completely revolutionize the payments industry by enabling interoperability, minimizing cumbersome transaction processes and reducing transaction fees.

To unlock the potential of sellers and consumers, we must create a consistent, reliable and improved service that puts consumer protection and experience at the forefront.