Open banking is electronic money institutions' open door
Electronic money institutions (EMIs) make their living by throwing out the rulebook, moving fast and thinking freely. Innovative services based on e-wallets and prepaid cards are commonplace and support a wide variety of use cases, from state pension and benefit payments to payroll, gift cards, loyalty, gaming, FX transfers, personal finance management solutions and more.
The advent of open banking gives EMIs a once-in-a-generation opportunity to carry on doing what they do best, but to do it better: faster, cheaper, and with broader horizons. A new market for innovative third-party financial services is evolving and EMIs are perfectly positioned to take early advantage. That said, this market is also open to everyone else, which is why EMIs need to take a close, strategic look at APIs now - today’s opportunities are rich and varied, but won’t last forever. Sooner or later, banks are going to catch up.
Making a business out of staying ahead of banks is a delicate balancing act. Compared to most banks, the majority of EMIs are modestly resourced and must sprint to develop the services that keep them popular and front-of-mind. Consumers want an increasingly frictionless UX and smarter, more personalized in-app and online services. Investors want returns. EMIs also want lower payment acceptance fees and to boost conversions, and everyone wants better security and fraud protection, together with faster payments.
For EMIs, time-to-revenue is critical and, in this multiple-stakeholder world, the pressure is on to call the right shots the first time.
How can open banking help? While it’s true that over time API connectivity will enable banks to offer EMI-like services, like most things with banks, that’s going to take some time. In the interim, agile EMIs can use open banking to evolve their services and shore up their businesses in parallel. With research from Juniper suggesting that nearly 50% of the world’s population will be using some kind of digital wallet facility by 2024, the near-term market opportunity for EMIs is very real indeed.
A strategic outlook will pay dividends. Particularly now, considering that a high proportion of EMIs remain either unaware of their obligations under PSD2 or focused on integrating basic compliance APIs. EMIs that take longer-term positions and harness the right blend of market connectivity and developer support have a great opportunity to take charge of the sector and the next generation of digital financial services.
How? By looking beyond compliance and leveraging APIs to cut costs, they may enhance their customer UX and enable the development and introduction of new services quickly and at scale. Account-to-account (A2A) payments, for example, one of the first open banking use cases to gain popular traction, is a convincing first step. This service alone stands to change the wallet-load game for good, eradicating card scheme, processor and interchange fees and replacing them with one vastly reduced transaction fee. Funds also clear near-instantly, enabling a new last-minute-load experience for users and improving conversion rates for businesses who avoid accepting card payments altogether due to punitive fees.
The real potential for EMIs, however, lies beyond faster and cheaper. By leveraging open banking, EMIs can tap into a new age of hyper-connectivity to third parties. They can also connect to a ready-to-go ecosystem of merchants, banks and other service providers, and work these connections to create new data and payment-based services uninhibited by national borders and old-world networks. Token’s market platform, for example, already has full bank coverage across Europe (defined as 90% of all accounts), via API-based connections to thousands of banks.
Establishing this level of connectivity, however, requires EMIs to do their due diligence. Not all off-the-shelf API providers enable this level of additional functionality and building out to this level internally is a serious ask. Even if an EMI does have the developer resources necessary, they still need to overcome the challenge of integrating with an ocean of proprietary APIs from their customers’ banks, as well as from merchants and other service providers, before they can even think about getting new services off the ground.
It wasn’t long ago that banks viewed open banking simply as a PSD2 compliance exercise. Only recently have these tankers started to turn and refocus on developing commercialization strategies. EMIs are in that same position now, only they have agility and innovation woven into their DNA. With the right start, they can mobilize quickly to deliver tangible value to their customers and set themselves comfortably ahead of the pack for a long time to come. Having already carved out their niche by moving faster than the competition, there is every reason to earmark EMIs as early champions in banking’s new digital age.