Open for Business: Why Payroll Providers Should Embrace Open Banking

It’s hard to think of an emerging trend that gets more love than open banking. The practice of secure financial data sharing – at the client’s request – between banks and third-party service providers via application programming interfaces (APIs) has been hailed as the future of banking, fintech, and the entire financial landscape.

According to the UK’s Financial Conduct Authority (FCA), the number of open banking users in the Kingdom has increased steadily over the past five years, reaching 7 million active users and 1 billion API calls per month. Those numbers pale in comparison to Europe. A new study by Juniper Research estimates that by 2027, Europe will be responsible for 406 billion API calls generated via open banking – 70% of the global total.

“Europe has led the way on open banking, and is an example of how regulator-led approaches can stimulate innovation,” said Nick Maynard, research co-author at Juniper Research. The regulation Maynard referred to is called the revised Payment Services Directive (PSD2), an EU Directive that updates and enhances the initial PSD from 2007.

PSD2, which came into effect in 2018, opened up the EU market to third-party service providers offering services based on access to information from customers’ payment accounts, such as transaction history, account details, and other financial data. By granting regulated third-party providers access to their financial data, individuals and businesses can benefit from innovative solutions and an enhanced customer experience.

The broad spectrum of services enabled by the PSD2 includes:

• Personalized financial management tools, such as budgeting apps and investment platforms.
• Lending services. Loan applications depend on credit and risk assessment procedures (such as AML), which open banking can facilitate and significantly improve. In addition, open banking creates more opportunities for businesses and individuals to gain financing through alternative lenders.
• Payment services. The Juniper Research study found that open banking payments transaction values will increase from $57 billion in 2023 to more than $330 billion globally by 2027, with Europe accounting for 80% of these transactions.

Level the payments field

Open banking payments – also known as ‘pay by link,’ ‘pay by bank,’ or ‘instant bank transfer’ – are account-to-account transfers. They are faster and less expensive than traditional payment methods, like card payments. On top of saving time and money, open banking payments contribute to a more integrated payments market, enhance consumer protection, and level the playing field for payment service providers by adding new players.

Adding payroll payments to the open banking ecosystem is a natural next step for all sides – regulators, consumers, and payroll providers. After all, payroll providers are sitting on valuable employment and income data that can streamline verification processes for various financial services, such as mortgage lending, tenant screening, background checks, government verification processes, and more.

For regulators, who have the consumers’ interests at heart, this is a no-brainer. For employees, this is a way to deliver a more accurate and complete picture of their finances to third-party providers to get better and cheaper financial products and services. And for payroll providers, who often preach about optimizing the employee experience, this is a chance to improve that experience in a very concrete way.

Serving the underserved

Joining the open banking ecosystem is also a chance to support greater financial inclusion.

According to the World Bank, financial inclusion “means that individuals and businesses have access to useful and affordable financial products and services that meet their needs.” While the latest Global Findex, the World Bank’s dataset on how people access and use financial tools, depicts a more financially inclusive world, 1.8 billion people are still left out of – or poorly served by – the global financial system.

Most of these people live in emerging and developing economies (EMDEs). Open banking, which opens the door to fintech solutions and platform-based offerings, can help increase the number of accessible services in EMDEs – just as it did in advanced economies, like the UK, where it was introduced in 2018 as the local implementation of the EU’s PSD2.

According to a Bank for International Settlements (BIS) working paper, titled Platform-based business models and financial inclusion, “over 200 firms regulated by the Financial Conduct Authority (FCA) are now enrolled in open banking in the UK. Among them are a number of fintech firms developing innovative solutions targeted at helping lower-income, financially vulnerable individuals or traditionally underserved groups.”

Through open banking, fintech companies are already helping underserved groups to manage their cash flow more effectively, set aside a portion of their salary for saving, build out their credit profiles, protect themselves from financial fraud, and more. Imagine how much more could be done with payroll data. Schedule a demo to find out.