Open banking is a term used to describe the use of application programming interfaces (APIs) to provide access to banking and financial services. In essence, it refers to the ability of third-party developers to build applications and services that work with banks and other financial institutions.
With Mastercard’s acquisition of Finicity, a major Open Banking participant, many questioned how Mastercard would implement solutions without impacting its own network solution. Now Mastercard has introduced a solution using Finicity’s capabilities. The solution provides pre-processing and routing against an Open Banking initiated payment. Permissioned by the consumer for a payment, the service utilizes Open Banking APIs to collect account data which is analyzed to determine the best routing for the transaction. A payment from a low balance account that is also a high transactor might be routed to a Real-Time Payment rail, while a high balance account might be routed to a slower and lower cost rail:
“Developed by Finicity, the open banking specialist acquired by Mastercard in 2020, the Payment Success Indicator and Payment Routing Optimizer use advanced data analytics and machine learning to make the payment experience safer and smarter.
Using real-time bank account information permissioned by the consumer, Payment Success Indicator lets the payment originator — a merchant, a bank, a digital wallet, or payment service providers — assess a consumer’s balance and historical behavioural risk patterns for each transaction.
The Payment Routing Optimizer interprets that score and recommends the optimal day and payment rail (such as Same Day ACH or Next Day ACH) taking into account cost, speed and risk.”
By giving merchants and other financial services providers access to customer financial data, open banking allows them to provide more tailored services and products that meet the specific needs of their customers. In addition, open banking gives customers more control over their financial data, allowing them to share it with only those merchants and financial services providers that they trust. Ultimately, it has the potential to make the entire financial system more efficient and effective by giving merchants and other financial services providers direct access to customer data.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group