This is an excerpt from the Future of Payments 2025 report.
Financial institutions need to transform their entire business and operating model to achieve bespoke, modular digital solutions and improve profitability. So, how can open banking and embedded finance help with this goal? And which hurdles remain?
Annalisa Ludwinski, head of correspondent network management, Investec, argued partnership is key. “Over the last few years there has been a shift from self-building or developing legacy systems, to partnering with specialists who have niche expertise in
providing solutions for clients.” Alongside this cooperation, there has also been consolidation, as “larger players move from partnership to ownership, which reduces access to other players if they do not continue to offer services.” At all costs, access must
remain high – in order to maintain competition and foster innovation.
Evidently, open banking creates challenges as it does opportunity. By opening data for others to absorb and present to consumers, institutions expose themselves to the possibility of mining this data. This could allow competitors to develop bespoke solutions
for those consumers.
Could this result in some banks losing custom as their unique selling proposition (USP) wanes? This is yet another area to monitor closely. While regulatory controls or restrictions on accessing such data could be tightened, the policing of this would be
extremely complex.
Katja Lehr, managing director, EMEA payments solutions, J.P. Morgan Payments, acknowledged that navigating this frontier will be tough, but was keen to underline the potential rewards: “Financial institutions are uniquely placed to offer end-to-end embedded
solutions. The data financial institutions have today, as enriched through open banking, will define the opportunities of tomorrow. Using information to automate payments – also known as programmable payments – or other activities, such as transfer of ownership,
are just some examples how banks can add value.”
Open banking and embedded finance: Where are we headed?
It’s all too easy to forget just how much change open banking has enabled in the several years since it was introduced. Looking ahead, to the next five years – as end-users’ payments experience is fine-tuned and the underlying architecture is tweaked to
increase customer satisfaction – we can expect the same amount of innovation again, or more. But what pain points remain? Will the European Payment Council (EPC’s) SEPA Payment Account Access (SPAA) scheme, for example, be instrumental in paving the way for
open banking in the Single Euro Payments Area (SEPA)?
Ludwinski believes so. “In Europe, many of the major banks are not currently offering SEPA Instant, and the demand for and usage of open banking is relatively low. When SEPA Instant becomes the norm – just like how faster payments have become in the UK –
consumers will begin to demand more from banks. I expect that open banking adoption will be required, particularly for solutions such as ‘pay-by-bank’ which need instant rails to facilitate payments.”
“If you couple this with developments in the way payments are increasingly being processed, such as the use of quick-response (QR) codes,” Ludwinski continued, “the method becomes even more streamlined. In less developed countries, the practice of instructing
an account to make merchant payments by scanning a QR code is on the rise. However, for this to be a viable alternative, instant payment needs to underpin the solution.”
Lehr, too, pointed to consumer demand as the guiding force on the open banking landscape. “Today, users expect easy, slick, straight forward, digital experiences. Technology incumbents have set the bar high in terms of customer experience.”
But difficulties remain. Much of the “business complexity” is still revealed to end-users in many banking apps today, observed Lehr. This should be moved into the background: “Repetitive information collection needs to be solved, too. While the products
a customer is using are provided by different parts of the bank, background systems need to be connected so that a client is not impacted by the silos the organisation has created.”
Clearly, data accessibility is becoming increasingly paramount for decision making. “Open banking, as defined in the second Payments Services Directive (PSD2), was a good first step in the right direction,” noted Lehr. “The EPC’s SPAA scheme has the potential
to be a catalyst for a broader adoption of open banking in SEPA. Data sharing needs to be expanded to harness the full opportunity of open banking, including the kind of data that can be shared, who can share data and how it is shared.”
Cloud-based managed services
A vision for the future of payments would be incomplete without the cloud. It is destined to play a big part in the ongoing digital transformation in banking. So, what is the best strategy for banks to streamline their operations, increase scale and improve
time-to-market? Is payments-as-a-service (PaaS) a viable model?
Amelia Ruiz Heras, head of global solutions consulting, payments, Finastra, pointed out that in a rapidly evolving digital landscape, “banks, lenders, and other financial institutions face mandatory regulatory requirements, like ISO 20022 standards and SEPA
compliance demands, increased competition, and rising customer expectations for faster, more convenient payment transactions.
"PaaS has rapidly emerged as the solution – offering streamlined payment processing, reduced complexity, and enhanced compliance. With PaaS, organisations can automate multi-rail payment processing, improve operational efficiency, scale to meet fluctuating
market dynamics, and swiftly deploy new clearings and alternative payment methods.”
According to Finastra and Datos Insights, the top three business drivers for PaaS are “reducing operational complexity, lowering total cost of ownership, and launching new services, faster.” PaaS also delivers scale, redundancy, security, analytics, and
compliance measures.
Ruiz Heras advised banks to look for a PaaS solution that includes “pre-built business workflows and modules, automated deployment and onboarding tools, and the ability to easily integrate third-party solutions to accelerate timeto-market.” It should also
have “open architecture, application programming interface [API] frameworks, and multi-rail support to facilitate seamless integration, adaptability, and flexibility.”
In particular, the solution should be “built on a cloud architecture that can deliver 24/7/365, low-latency, scalable, and secure instant payment processing. The solution must also offer seamless multi-channel experiences, payment visibility, fraud prevention,
secure transactions, and emergency payments.”
Lehr concluded by acknowledging that client expectations, as well as regulatory and legal requirements, are ever-increasing. “Managing expectations can be difficult not only from a financial standpoint, but also from a resource standpoint. Like other industries
that have gone through comparable challenges, financial institutions must ask themselves whether it is feasible or business-sensible to do everything themselves and develop in-house solutions. Focusing on core competencies while outsourcing other activities
must be considered as an approach to wider digital transformation.”