How to Leverage Open Banking in Simplifying Cross-Border Payments
Making customers feel in control and secure is critical for FIs. Discover how open banking supports FIs to provide seamless cross-border payments.
According to the Bank of International Systems (BIS), digitalizing trade economics can contribute to building resilience in the global financial ecosystem. While open finance systems operate seamlessly within national boundaries, collaboration with other jurisdictions remains a challenge. The BIS emphasizes that digital data portability is the key to building a unified global financial ecosystem with smooth money movement across jurisdictions. It suggests leveraging data to reduce the cost and friction in cross-border transactions. This is where open-banking-based APIs fill the gap to enable cross-border payments.
The global cross-border payments industry is poised to present an opportunity worth $311.5 billion to banks and FIs by 2032.
Brett King foresees a future that he calls Banking 4.0. He describes it as one with “banking everywhere but not at a bank.”
Cross-Border Payments: The Vision
Consumers and payment enablers envision a cross-border ecosystem with:
Seamless Transfers
Intermediary-free money movement for B2C, B2B, C2C, and C2B transactions.
Rich Offerings
An innovative fintech ecosystem that swiftly responds to customer needs, at scale.
Operational Efficiency
Streamlined compliance and standardization, leveraging automation and data-powered insights.
Key Principles of Open Banking
Several bilateral and multilateral arrangements effectively reduce friction and smoothen money movement across financial systems of different countries. However, the BIS has raised concerns that this could lead to fragmentation, which, in turn, would translate into elevated scalability issues. Interoperability among these fragments could become more complex and geopolitical incongruencies may restrict user experiences. Therefore, careful planning, collaboration, and adherence to international standards are critical to achieving interoperability at a global level.
The BIS launched Project Aperta to reduce costs and friction in cross-border transactions. The bank leverages open banking’s data portability to connect domestic systems with distinct jurisdictions. The project outlines the necessary open banking data policies to foster a frictionless cross-border payment ecosystem.
ISO 20022 is a critical milestone for achieving open-banking and cross-border payment goals. The standard defines a global language for exchanging transaction data.
Open banking enables FIs to leverage APIs for real-time payment processing and pre-validation of transaction data. It paves the way for banks and payment enablers to expand their global footprint while improving operational efficiency and use-case implementation in cross-border payments.
As open banking enables money movement directly between bank accounts, the number of intermediaries in a cross-border transaction significantly declines. Every reduced layer translates into lower error induction, friction, and costs. Plus, real-time access to customer data and faster payment rails accelerate settlements.
Open banking APIs effortlessly integrate cutting-edge security mechanisms, such as OAuth 2.0 and Strong Customer Authentication (SCA). This enhances security while reducing the operational burden at each stage of the transaction. Additionally, open banking’s low-intermediary operation mechanism facilitates real-time transaction monitoring, improving traceability through the money movement pipeline.
With greater accessibility and open ecosystems, customers have more choices. The dynamic marketplace creates an environment for FinTechs to launch state-of-the-art offerings. This fosters competition among financial services providers, encouraging them to innovate to push lower costs and remove speed barriers.
Banks and payment enablers can leverage open banking for cross-border transactions in various ways, such as:
Open banking APIs help diverse players, including third parties, to share user data securely. FIs can use this data to optimize conversions and customize payment experiences. They can also extract deep insights from the data to strategically plan future offerings and be prepared to respond to consumer needs as they arise. Personalization boosts customer satisfaction.
APIs enable banks, credit unions, and other payment enablers to create familiar user journeys. Availability of 24/7 mobile experiences with intuitive interfaces makes cross-border banking as seamless as domestic. These also enable seamless movement of client information from one payment mode to another, depending on customer preferences. This enhances customer loyalty and retention.
FIs can leverage customer data to find innovative ways to define credit-worthiness. This can be especially helpful in driving the financial inclusion of unserved and underserved populations. Extensive user data can offer deep insights into the borrower’s financial behaviors and associated risks. This creates opportunities for banks and FIs to make credit and other financial services accessible to the underserved and position themselves at the forefront of innovation.
Payment enablers face several changes in enabling frictionless payments in the fragmented global financial ecosystem, including:
Regulatory complexities and compliance requirements make entering newer markets costly and time-consuming. The risk of penalties due to stringent oversight further adds to the complexities.
Read More: How to Leverage Open Banking in Simplifying Cross-Border PaymentsHow Open Banking Elevates Cross-Border Payments
Eliminates Intermediaries
Facilitates Traceability and Security
Fosters Competition
Leveraging Open Banking for Cross-Border Payments
Incorporating Data Transparency
Streamlining User Experiences
Innovating Creditworthiness Assessments
Challenges to Realizing the Vision
Regulatory Challenges
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