Six reasons you can’t ignore open banking-powered payments

Open banking, also known as the Consumer Data Right (CDR) in Australia, is gaining momentum in the financial services space and the everyday consumer is becoming more aware as new products hit the market. A recent report, by open banking provider, Frollo, revealed that 78 per cent of Australian finance and broking professionals are familiar with open  banking and this figure is set to grow exponentially as the CDR rollout ramps up. In this guide, we cover the why, what and how of everything you need to know about open banking for your business.

Open banking explained

To drive competition and the development of new financial products and services, the Australian government introduced the Consumer Data Right (CDR) regime in 2018. These regulation-led changes required banks to open up their data and formed the broader term ‘open banking’ that we use today.

Using Application Programming Interfaces (APIs), data holders – such as banks, other authorised deposit taking institutions (ADIs) and, later on down the track, energy suppliers and other service providers – are sharing data securely with accredited data recipients (ADR) – like fintech innovators including GoCardless. Creating an opportunity for ADRs to use the data to develop new products and services will change how we manage our finances.

The two key mechanisms of open banking:

1. Data holders are banks and other ADIs who provide accounts for consumers. Under the CDR, data holders are mandated to make customer data available to accredited third parties – more on this below.

2. Accredited Data Recipients (ADRs or accredited providers) are the third parties that are innovating to create new products and services.

Reviews are currently underway to consider a reform in the existing CDR framework, which will authorise ADRs to perform ‘action initiation’ – to make withdrawals on behalf of account holders when permitted. This new development will shake up the open banking landscape in Australia and create more opportunities for increased competition and consumer benefits, across a range of sectors. 

How do open banking services affect your business and how could you benefit? 

Here are 6 benefits of open banking for payments

Open banking has a huge potential to influence payments for large enterprise businesses in six major ways:

1. Better customer payment experiences

Using open-banking powered bank-to-bank payments could make the payment process smoother and frictionless for consumers compared to current payment methods, like credit and debit cards. As payment experiences improve, we’ll see consumer adoption and their expectation for alternatives like this to grow too.

Better payment experiences will pay-off. According to research by Baymard Institute, 18 per cent of shoppers abandon a cart at checkout due to a “too long/complicated checkout process”. Creating a frictionless checkout process with open banking could help reduce cart abandonment rates and boost conversion.

2. Getting paid faster

Investing in solutions powered by open banking could improve business cash flow. ADRs can make existing payment services smarter and faster by tapping into the power of the CDR and the New Payments Platform mandated product PayTo. This brings with it the potential for businesses to receive payments instantly. 

According to Forrester, the average Days Sales Outstanding (DSO) is 20 to 30 days for most Australian businesses. This identifies a huge opportunity for businesses to make efficiencies and get paid faster. Collecting payments swiftly has a positive impact on cash flow, revenue and company growth. Making the ability to get paid faster with bank-to-bank payments a high priority for your business.

How do bank-to-bank payments powered by open banking make payments faster than card payments?

1. Bank-to-bank payments are fully integrated and use a digital pull-based mechanism, where the merchant requests payment. In contrast, manual bank payments or credit/debit card payments require the customer to send the payment to the business (push-based).

2. Bank-to-bank payments tend to have lower failure rates compared to credit/debit card methods. Thus, businesses spend less time chasing missed payments.

3. Payment cost-savings

Businesses stand to save considerably with open banking as these new payment methods have the potential to rival card payments.

Bank-to-bank payments are faster, more flexible and avoid the expensive transaction fees associated with credit cards. Meanwhile, the average credit card failure rate for B2B (9 per cent) and B2C (14 per cent) businesses is both a significant cost and a concern. Not only is the immediate loss of revenue an issue for businesses, but the cost of recovery and the resulting churn too.

With open banking, businesses can create cost-savings in payment collection and run more efficient payment operations.

4. Fraud prevention and security

Open banking can improve protection against payment fraud. Credit cards are a widely used payment method, however, they are often the focus of data breaches and pose a significant risk to businesses.

The CDR has privacy and security safeguards that will enable data holders and accredited providers to mitigate fraud and an inquiry into future directions for the CDR has outlined further recommendations to ensure that sensitive data is protected and customers identity can be confidently authenticated.

The accreditation process for ADRs, as it stands, is already incredibly extensive and requires organisations to have the capability to protect CDR data ‘from misuse, interference, loss, unauthorised access, modification or disclosure’, as well as have adequate insurance to compensate consumers for any loss that might occur from a breach of their CDR-related obligations. By using ADRs, you can rest assured that your business is sufficiently protected. You can also take advantage of the bank’s existing security measures – multi-factor authentication and biometrics, for example – meaning an individual’s banking information is never collected by the business. This is beneficial in reducing the volume of successful fraudulent attempts, data breaches and the associated costs of dealing with fraudulent payments.

5. Consumer demand is growing

Consumer demand for better financial and payment services is growing. According to Deloitte, the adoption of digital banking services –  like banking apps – are a good indicator of the potential adoption of open banking.

Last year, research from KPMG found that 32 per cent of banking customers in Australia who previously preferred face-to-face interactions now prefer using digital channels, signalling a broader shift towards a preference for new banking services and a positive sign for the adoption of open banking.

Trailblazers and latecomers: open banking around the world

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6. Staying competitive with open banking

Why are businesses using open banking to stay competitive?

Creating better payment experiences for customers, and improving operational efficiency to reduce the cost of managing payments, gives businesses a competitive advantage. Though limited, use cases of open banking from ADRs currently include; personal finance management, document collection and management and accounting software. 

As the appetite for open banking technology and consumer expectations for better experiences grow, being an early adopter of open banking in payments will give businesses a valuable competitive edge.

According to PwC, the consumer banking and payments sectors are the most likely to be disrupted by open banking. In Australia, the rollout of the CDR will eventually broaden to include energy and telecommunications providers and will surely expand further as adoption and demand strengthens. As more businesses invest in, and lead with great open banking experiences, the demand from consumers for open banking enabled products will continue to grow. Australian corporates and enterprises cannot afford to miss out on this opportunity.

* GoCardless Market Research, February 2021, 250 Commercial Enterprises.