By Marco Conte
The open banking revolution. Attend any event within the payments industry, listen to a panel discussion, or just talk to merchants working in the trenches, and the same points of discussion will come up time and again. Alternative payment methods, conversion rates, friction, abandonment, localization, the cost of payments, and card schemes are all hot topics of discussion right now.
But there’s one topic that brings all of them together. A topic that, while nascent, has the potential to transform the payments industry for both merchants and consumers. Enter the open banking revolution.
In this article, we’ll assess the promise of open banking, how merchants can utilize open banking protocols, and how soon this technology might change European and global payment landscapes.
Open banking: A primer
Browse Google or speak to a handful of industry insiders, and you’ll quickly find that people define open banking in a multitude of ways. For the sake of clarity, we define it as the practice of using open APIs to allow secure third-party access (typically by payment or financial service providers) to bank transactions and other data from financial institutions.
The open banking ecosystem addresses a range of consumer and merchant needs by increasing speed, trust, and personalization across the payments ecosystem.
Europe is an open banking pioneer. It was the first market to regulate the space thanks to the introduction of
PSD2 and the differentiation between AISPs and PISPs, thus removing the monopoly banks had over customer data.
This has led to initiatives and companies facilitating third-party integration and creating a new ecosystem of financial products. For example,
The Berlin Group is a consortium of over 26 major players in the payments industry working to increase interoperability standards in response to PSD2.
How can companies use open banking?
The functionality facilitated by open banking technology has a range of use cases. These include:
- Account ownership verification: instantly approve the ownership of business or consumer accounts.
- Credit risk checks: access an account’s historical transactions and derive several risk indicators about consumer spending habits.
- Personal finance management: aggregate data from multiple bank accounts to create a unified view.
- Payment reconciliation: use automated bank account access to stay on top of received payments.
- Payment initiation: accept consumer payments directly by initiating account-to-account transfers.
For merchants, payment initiation is one of the most promising and sought-after applications of open banking protocols. This functionality is already available to merchants, and discussions are already in place in several markets about Variable Recurring Payments (VRPs).
VRPs allow merchants and their PSPs to take recurring payments of varying amounts directly from the customer’s bank account without having to authenticate the transaction every time. It’s a faster and more flexible alternative to traditional direct debits that force merchants to take a fixed pre-agreed amount for every transaction.
Mandated
VRP initiatives have already arrived in some markets and are on the horizon in others. In the UK, for instance, the
Competition and Markets Authority (CMA) required the country’s nine major banks to support VRPs by 31st July 2022. Similar regulation is expected to follow in the EU, which would force all continental banks to facilitate VRPs.
How soon will eCommerce open banking become a reality?
Here at Congrify, we believe the integration of open banking protocols and eCommerce is not a case of “if” but rather “when”.
As regulation and consumer adoption levels grow, merchants will quickly feel comfortable accepting open banking payments. But they’ll also be compelled to do so because of the rewards on offer. Open banking payments offer two major benefits to eCommerce retailers.
First, accepting online payments is not cheap. Whether payments are facilitated by payment service providers, mobile wallets, or Buy Now, Pay Later providers, fees are an inevitable cost of business for merchants. Open banking payments will minimize or even eliminate a big part of those fees.
Second, it currently takes too long for merchants to receive their payments. Reconciliation can take several business days or longer using current online payment methods. But these could be slashed with instant payments that give merchants quicker access to cash and better cash flow.
Early adopters are already taking advantage of the open banking solutions discussed in this article. But there is still some way to go before this technology becomes mainstream.
From the consumer’s perspective, for instance, regulation must come into force that provides protection on a similar level to that offered by credit card providers. Customer payment success conversion rates will also need to meet the levels offered by existing solutions, without causing additional payment abandonments due to the different checkout experiences.
Open banking will make payment intelligence even more important
For merchants adopting open banking technologies, getting a 360-degree view of their payment data will be even more vital. By cutting out payment service providers, you don’t just eliminate fees; you also reduce the amount of data these platforms collect, process and analyze. That necessitates finding another data source.
At Congrify, we see open banking as an excellent data source to include in our data aggregation service — and one that makes it much easier for our customers to monitor payment performance and manage operational activities like payment reconciliation.
Contact us today to learn more about how Congrify can help you prepare your payment strategy for open banking.
