Financial institutions offer their customers a complex bundle of services.
You might reasonably expect that Open Banking is a fight over the budgeting app space. The banks have, via the magic of account records, a large portion of the underlying data about a household’s finances. You could imagine software using Open Banking to allow it to slurp in transactions and then categorize them. That would compete against the lackluster offerings the large banks have in their apps.
But Open Banking is not actually a fight over budgeting apps. Banks don’t make money on them and the best known standalone budgeting app, Mint, was acquired for a relatively small amount of money.
Payments, on the other hand, are an enormous business. They are monetized both by banks and by a diverse ecosystem of fintech providers.
The data banks find it annoying to make Open are, principally, account numbers. This is because, due to the long shadow of checks, possession of an account number (plus the routing number, identifying the bank) is sufficient to attempt to debit a bank account. Direct account-to-account transfers, including “pulls”, are a common payment method in many countries, but they are not a large share of consumer to business payments in the United States.
Why not? One reason is that the user experience of asking someone for their account number is pretty awful. There is no way to check in real time whether an account actually exists. Credit card numbers, in addition to having infrastructure which allows you to query them in real time, are specifically formatted so that typos in them are easily catchable.
Since you can’t know whether the account exists you certainly can’t know its current balance or whether a transaction posted against it today will succeed in a few days or be reversed for insufficient funds (or another reason). This means that businesses which use account transfers as a payment method would frequently suffer credit losses if they released goods or services at the time of “payment.” For many businesses, that isn’t a worthwhile tradeoff.
So they keep using cards. Cards give much stronger (but not foolproof) real-time guarantees of funds availability and likelihood of a transaction going through successfully. The ergonomics of card acceptance, at the register, through your phone, or in a web browser, are also much more palatable to most customers.
Several fintech companies, including Stripe, realized that they could use Open Banking to make account-to-account payments something customers would actually enjoy. The user is prompted at checkout whether they’d like to pay directly from their bank account. They log into their bank account and grants the fintech read access. This is a much stronger signal of authorization than simply knowing an account number. (We print those on every check, after all, and a check is designed to be handed to a cashier or waiter you’ll never meet again.) The fintech then grabs the account number and perhaps e.g. looks up the current balance.
Then, they can pull money from the account, through an ACH debit.
The ACH debit itself is not Open Banking. It is the ordinary operation of existing payment rails in the financial system. The ACH debit was just made much more convenient by Open Banking.