How open banking can help the energy sector
Over the past few weeks, I’ve been speaking with energy supply businesses who are curious about open banking and its implications for the sector. At GoCardless, we're using open banking as a platform to improve payments for our customers. In this blog, we look at how open banking could impact energy suppliers and consumers.
What is open banking?
Open banking is a new set of software standards for banks set by the Open Banking Implementation Entity (OBIE), an entity created by the UK’s Competition & Markets Authority (CMA) in 2016. The CMA’s goal is to drive competition and innovation in UK retail banking.
The new standards require UK banks to create APIs that allow two new types of services to be run by authorised, FCA regulated third parties (like GoCardless). These third parties will fall into two categories:
Account Information Services Providers (AISP): AISPs will be able to access consolidated information about payment accounts held by a user. Once authorised by the customer, AISPs will be able to access information such as current balance and transaction history.
Payment Initiation Services Providers (PISP): PISPs will be able to access a user's online payment account (with their consent) to initiate the transfer of funds on a user's behalf in near real-time. This represents an alternative way to pay online, avoiding the need for credit card or debit cards. These services are not yet widely used in the UK, but are commonly used in Europe.
But what does this mean for the energy market?
Identifying and helping vulnerable customers
In the utility space, identifying and managing financially vulnerable customers is a challenge. When customers fall into financial difficulty, they risk facing failed payment charges, which can make their situation worse, while energy suppliers may accrue bad debt and expend significant time dealing with these cases.
Imagine a world where suppliers are able to identify their most vulnerable customers in real time, ensuring those customers never have to incur failed payment charges; where energy suppliers can get in touch proactively with customers as and when issues arise, rather than when the customer falls behind on their third monthly payment. This is a future that can be created through open banking.
Obtaining customer account information, through an AISP, could help energy companies identify and manage vulnerable customers. Put simply, you will know if a payment is going to fail before you initiate it, enabling you to prevent failed payments and unnecessary customer charges, and reduce related support time.
Customers will need to opt in however. Here is an example of how that might work:
- When signing up, a customer opts in to protect themselves against bank charges associated with failed payments, by giving the supplier access to account information.
- The AISP checks the customer’s balance to know if a payment is going to be successful or fail.
- Payment rules are set to only initiate a payment when there are sufficient funds in a customer's account.
- If there are insufficient funds, payment is delayed and, after a set period of time, a support ticket is raised to change the payment terms to suit the customer's change of circumstances.
This kind of open banking enabled workflow could help to reduce bad debt and the volume of customer service calls, while improving customer experience.
Open banking will also improve security of payments for energy suppliers. Open banking APIs will authenticate payers in a more secure way, as they are triggering payments. This new authentication process will involve the use of two of three items from the payer:
- Something they know, e.g. a password or memorable piece of information
- Something they are, e.g. a fingerprint or facial scan
- Something they have, e.g a mobile phone, used for traditional SMS authentication
This will enable suppliers to be certain that the customer has access to the bank account that they’re paying with, and are not signing up with details obtained fraudulently.
In the future, we're hoping that the banks will be able to validate customer address details through open banking, which will enable suppliers to match billing address with supply address, closing another window of fraud in the market.
Avoiding card payment fees
After acquiring their first few thousand customers, most suppliers think about offering additional payments, such as card payments, to allow customers to make real time top-up payments, should they ever fall behind their payment schedule or usage.
The benefits of using card payments, and the reason they are the most popular way to pay in the world today, are twofold:
- You can authenticate the customer, relatively securely, from a remote location
- You can check balances and process payments in near real time
With open banking, suppliers will be able to perform these same two actions through a new set of banking APIs, that will very likely be more secure than using cards. The added benefit here is that suppliers will be avoiding expensive card networks and won’t need to pay fees to VISA, Mastercard or Amex, nor any other card processing fees.
With fewer companies taking a cut in the payment process, suppliers will be able to pass these savings on to the customer, or reinvest them back into their business.
While Open Banking officially began on 13 January, most banks are still in the process of testing these new services.
Since these services require opt-in, there is likely to be slow start while customers gain trust in these new payment services. Suppliers who become early adopters of open banking technology however - and who communicate effectively and incentivise customers in the right way - could achieve significant competitive advantage.
If you’re a utilities supplier and you want to know more about what GoCardless is doing in this space, get in touch.