Home Banking US Banks: Take a Lesson (or Three) From Europe

US Banks: Take a Lesson (or Three) From Europe

by internationalbanker

By Eric Bierry, CEO, Sopra Banking Software





Consumers across the globe are evolving in their financial behaviors, just as they are with everything else—they want things quickly and personalized just for them. And Europe has taken note. Specifically, its regulations in response to consumers’ changing behaviors have created a fundamental shift in the banking landscape.

Take open banking, for example. Before Payment Services Directive 2 (PSD2), open banking was a niche capability, and banks lacked the infrastructure to support mainstream adoption despite customers’ demands for a more seamless and interconnected financial ecosystem. Now, with PSD2 and its successor, Payment Services Directive 3 (PSD3), banks are not only supporting open banking but significantly scaling it, with more than seven million open-banking users today.

A similar shift is taking place across the pond. US consumers’ use of third-party instant-payment applications, such as Venmo and Cash App, has skyrocketed, prompting US regulators’ response, FedNow, in July 2023. FedNow allows banks to provide instant payments to customers, enabling them to compete with unregulated fintech (financial technology) offerings.

While the United States is making moves across its financial market, the country has not experienced the same rate of adoption of new financial capabilities as Europe and beyond. This is, in many ways, because US regulations haven’t matched the cadence of Europe’s, and Europe’s regulations haven’t been as influential overseas as in places such as the United Kingdom.

US consumers are increasingly flocking to digital banking and payments, and with country-wide regulations expected, this will likely accelerate in the coming years. The US is not without help to get there—it has an excellent roadmap from the financial experiences that are currently taking shape in Europe. By analyzing the regulations, trends and technologies that are taking hold in Europe, US banks and financial institutions can better inform their digital-transformation strategies and next steps, learning from the successes and mistakes of their European predecessors.

Some banking trends emerging across the US have already gone mainstream in Europe, namely open banking, instant payments and pay by bank. US banks and financial institutions can implement three lessons from Europe to stay ahead of these emerging trends and resulting regulations.

Transform banking experiences with data through open banking.

Most US firms and banks offering open-banking capabilities have implemented them in response to customer demand—not regulations. But this is no easy task. Bringing open banking to life for US banks today means working with fintech partners and third-party technologies, because there is no regulated system for banks alone to integrate open banking.

Early signs suggest this may change soon, though, with the Consumer Financial Protection Bureau’s (CFPB’s) Personal Financial Data Rights Rule proposal, establishing strong data rights and protections. This will help accelerate the shift to open banking by standardizing how data is shared and introducing security measures as data moves between banks, financial institutions, fintechs and others.

This shift will also heavily influence customer adoption, as consumers will have more control over how their personal financial data is shared. With more insights into customers’ preferences and banking behaviors, banks can provide more personalized experiences, serving each individual customer’s needs.

Open banking provides banks access to previously unattainable data, allowing them to secure holistic pictures of their customers’ finances. Data sharing between banks and fintechs not only helps achieve this holistic picture but also provides a new avenue for innovation. Fintechs have the agility to develop new products and solutions for banks that allow them to leverage large swaths of customer data to derive data-driven insights for each customer’s personal-banking experience.

It’s not just a matter of US firms staying a step ahead to more closely resemble Europe but also gaining a competitive edge in a crowded market. Once open banking is a regulated capability that every bank can offer, banks will need to go the extra mile and find ways to innovate and stand out, so starting the journey today is critical.

Take advantage of the instant-payment boom before it’s too late.

Instant peer-to-peer payments are not a new concept in the US, as platforms such as Zelle, Venmo, Cash App and others have become commonplace in recent years. In 2023 alone, Zelle, a single platform, received 2.9 billion transactions totaling $806 billion in the US.

But even when consumers use Zelle through their banks’ apps, a third party is handling the transaction. This means there is less security and oversight than if the offering were coming directly from a federally regulated bank. These transactions are still highly secure; they are just not held to the same standards by regulators as the banks themselves. FedNow is now leading a shift to instant payments by enabling US banks to directly offer real-time payments to their customers through a centralized and regulated system.

These federally regulated instant-payment offerings are not without their challenges, though, as they need to gain customer traction. Consumers have become accustomed to the third-party apps they already use—most of which provide instant transfers at no cost and securely—so there’s no real incentive to switch. Further, banks need to integrate the FedNow infrastructure into their existing systems, which may present technical challenges for banks that still use legacy tech stacks.

In Europe, to overcome the legacy-technology issue, most banks are adopting digital, cloud-based banking infrastructure that provides the flexibility to build new offerings. This enables European banks to offer instant payments, open banking and other capabilities rapidly compared to other regions. Modern systems require substantially less downtime and human oversight compared to legacy systems, powering customers and businesses to transact money in real-time around the clock. Further, they are highly scalable for banks and allow for increased volumes through SEPA (single euro payments area), FedNow or any other transaction system.

Now is the time for banks to spearhead their digital-transformation journeys and undergo the same fundamental changes European banks have made to their infrastructures to ensure they stay ahead of the instant-payment offerings of banks and non-banks.

Meet customers where they are today, and transform to meet their needs tomorrow.

Credit and debit payments dominate the US landscape, with few customers and merchants opting for the pay-by-bank offerings that have risen in popularity in Europe. Customers in Europe opt for this method as a seamless way to pay for goods and services without inputting a card number.

The US lags largely because there is no standardized approach to open-banking frameworks that power pay by bank. Making a transaction requires sharing account data and information, often between different institutions, which is difficult without open-banking infrastructure. Customers also do not understand the benefits of pay by bank, making it a less preferred option.

Pay by bank also significantly benefits merchants, eliminating card-processing fees to increase their overall bottom line. However, widespread use in the US depends on banks not only adopting the infrastructure but also educating their customers on the benefits of pay by bank, including short payment settlement times. Once merchants and customers understand the benefits of pay by bank, banks can harness their open-banking capabilities to make the offering more secure and exceed compliance expectations.

Banks don’t need to start from scratch when it comes to capitalizing on these trends. By looking to Europe and other global markets that have already adopted these capabilities, they can set themselves on the track for success. These changes cannot and will not happen overnight, so banks don’t need to force them to happen quickly. By starting preparations now and setting internal expectations, timelines and goals, US banks can take advantage of the latest trends and gain higher ground in the market.


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