3 ways SaaS businesses can harness the power of open banking
By Andrew GilboyApr 20215 min read
Everyone knows open banking is coming to the US, but it’s worth a refresh as to how we got here. According to The Balance, “open banking is the practice of sharing financial information electronically, securely, and only under conditions that customers approve of.”
Europe was first out of the blocks, with a regulation called PSD2. Indeed, regulators rather than industry were at the heart of open banking in Europe – PSD2 is a blend of data protection and a reaction to banks’ data protectionism in the past. The result was two key innovations:
The structures and standards for the sharing of bank-sourced data through APIs
And a broad distinction between two types of open banking service provider:
Account Information Service Providers (AISPs), who only use your banking information, for example to assess your finances and help you make better financial decisions.
Payment Initiation Service Providers (PISPs): who are authorized to launch payments into or out your account, for example to support subscriptions. These transactions are instant bank-to-bank payments without the need for a card, digital wallet, or direct debit mandate.
The result was an extraordinary burst of innovation in FinTech. The Balance again: “Application programming interfaces (APIs) allow third-party providers (TPPs) to access financial information efficiently, which promotes the development of new apps and services.”
In the US, financial institutions have seen the effect of this innovation in Europe and are starting to capitalize on it. But the nature of the system here is different. In the US, open banking is led by the financial services industry rather than the regulator. Consultancy KPMG reports: “The complexity of the federal financial regulatory system means there is little potential for federal-level open banking regulation any time soon. Yet some of the greatest activity in open banking is happening in that market as players vie to find new ways to deliver new and compelling customer experiences.” And the Federal Reserve Bank of Boston continues, “While regulation is driving open banking in many countries, the emergence of fintech and financial institution (FI) innovation initiatives are the key drivers of open banking in the U.S…. as they seek enhanced and expanded digital services for their customers.”
And there is plenty of consumer demand for these expanded services, supported by an undercurrent of the same sort of desire for data control as has been seen in Europe. PYMNTS reports, “The economic headwinds and rising fraud trends wrought by the pandemic have caused consumers to scrutinize the trust they have tied to FIs and their own financial data. In the U.S., 56% of consumers would like more control over their own digital data… the pandemic has helped shine a spotlight on the infrastructure underpinning the great digital shift toward online and contactless transactions.” There is every evidence that, whilst the digital generations (Millennials, Gen-Z) are earliest to embrace open banking tools, the demand is universal.
This demand is predicted to power open banking to a market value of over $43BN by 2026, with a consistent sector growth of 24.4% for the next five years.
Putting open banking to work in the SaaS world
SaaS businesses should be taking a particular interest in open banking. For starters, SaaS companies are digital-first. The SaaS model has always been the natural home of the API. SaaS leaders (Salesforce, Slack etc.) have grown their market share through collaboration and the building of resilient ecosystems. Open banking is evidence of the financial services industry finally catching up and joining these open ecosystems.
And the SaaS model is built on resolute customer focus. Again, open banking is evidence of the banking industry finally getting the message. In the words of Venture Beat, “The shift is going to permanently alter the relationships consumers have with their financial institutions, as well as rock the traditional banking business model… Shifting from a product mindset to a complete focus on serving customer needs is going to be a key driver of innovation and competitive advantage.”
Together, SaaS companies in partnership with FinTechs and banks, should be able to add new seamlessness and service to the SaaS experience. Indeed, open banking has something to offer SaaS businesses throughout the customer lifecycle:
Onboarding and signup: Every SaaS business knows that complicated signup systems distract customers and directly impact profitability. Anything which makes onboarding more frictionless is a powerful business driver. Open banking can mean form fields are filled in automatically. It can allow key checks to be made (affordability, fraud prevention checks, income verification, identity etc.) on the fly, and without redirection to a third party website. All of these innovations remove clicks, typing and complexity; moving the customer ever further forward towards a successful signup.
And SaaS businesses can expect their banking partners to deliver an increasingly feature-rich set of services. PwC reports, “Competition is set to increase. Many banks are partnering with fintechs to help differentiate their offering and improve their appeal to digital natives. Modular APIs allow banks to quickly and easily link up with multiple partners to offer a range of new services... As offerings are augmented and competition increases, retail banking is going to be less of a utility business and more like other sectors facing constant pressure to innovate, differentiate or die.”
Insights and Personalization: A host of new fintechs have popped up which promise to compile a picture of our financial wellbeing from the increasing number of bank accounts and subsidiary services we use. They can then offer insights and advice, much like an automated personal financial advisor. But the same insights can also be used to personalize the digital experience beyond banking: retailers can offer buying suggestions tailored to the user’s budget. SaaS pricing packages could be offered on-screen in the order that individual customers are most likely to accept. Algorithms can be tailored to offer services or upgrades across the customer lifecycle which match each customer’s propensity to spend, never ‘leaving money on the table’.
Loyalize, for example, is a customer engagement and loyalty platform which combines payments and loyalty into a single transaction. Payment insights gleaned from open banking connections with a customer’s bank account give Loyalize’s retail clients a real-time, omni-channel view of customer transactions and purchasing behaviors, allowing them to create segmented, targeted offers and campaigns with pin-sharp accuracy and relevance.
Faster, cheaper, smarter payments: But perhaps most importantly, open banking can smooth the way for both one-off and ongoing payments – essential for SaaS businesses, which typically rely on successful subscription payments. Open banking can help ensure that a customer has funds in their account (and make contact for remedial action rather than dropping the transaction). It can therefore reduce the amount of void transactions and customer churn, add predictability to SaaS operations, and minimize fraudulent transactions in the ongoing customer relationship – all wrapped in a seamless customer experience. As Arjun Kakkar, VP Strategy and Operations at ID/verification specialists, Ekata told PYMNTS, “Merchants can offer checkout options way beyond our imagination that could optimize customer value creation.”
And SaaS businesses could also save on transaction costs with open banking as these new payment methods easily rival card payments. As a bank-to-bank payment, open banking transactions are faster, more flexible and avoid the expensive transaction fees associated with credit cards. Alto, for example, is a startup digital pharmacy delivering prescription medications in three U.S. cities to more than 50,000 patients. With no physical stores and therefore no need for traditional point-of-sale systems, direct payments using ACH with open banking is allowing the business to save $50 on high-value transactions when compared with typical credit card fees. That’s a monthly saving of $20,000; and a saving which continues to grow with the business.
Capitalize on ‘the year of open banking’
Open banking doesn’t require a rip-and-replace of your existing payment systems. Indeed, many of its standards and functionalities are designed to be practically transparent to the user. They won’t have to change their behaviors, and all your existing payment methods can stay the same. Open banking simply offers SaaS businesses an improved payment experience and the potential for significant cost reductions, too.
And it’s time to get involved. International Banker calls 2021 “The year of open banking”, continuing, “The convenience and personalization provided by open banking offer huge opportunities not just for consumers but also for small and medium-sized enterprises as they look to bounce back from a difficult 2020”. Duncan Barrigan, Chief Product and Growth Officer, GoCardless, says “2021 will be the year many companies, including GoCardless, will enter the market with Account information and Payment initiation capabilities. Over time, we see open banking payments mounting a very credible challenge to the dominance of cards, once consumers and businesses alike experience the advantages.”