Open banking is gaining momentum in the finance space and the everyday consumer is becoming more aware as new products hit the market. GoCardless research* reveals that 91% of UK commercial enterprises have heard of or encountered open banking before. 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 UK government introduced the Open Banking Standard and the EU brought the PSD2 (Payment Services Directive 2) into force 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), banks are sharing data securely with Third-Party Providers (TPPs) - like GoCardless. Creating an opportunity for TPPs to use the data to develop new products and services that will change how we manage our finances.
The two key mechanisms of open banking:
Payment Initiation Service Providers (PISPs) are the third parties that are innovating to create new products and services based on enabling instant bank-to-bank payments.
Account Information Service Providers (AISPs) connect account information from different bank accounts and payer information with TPPs.
How do open banking services affect your business and how could you benefit?
Six 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, 21% 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. PISPs can make existing payment services smarter and faster. Reducing the time it takes for businesses to get paid.
According to Forrester, the average Days Sales Outstanding (DSO) is 20 days or more for most 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.
Forrester Consulting: Rethink your payment strategy
Download the full report for all the important insights, as well as recommendations on how businesses can meet ever-evolving payment challenges.
How do bank-to-bank payments powered by open banking make payments faster than card payments?
Bank-to-bank payments are fully integrated and use a digital pull-based mechanism, where the merchant requests payment. Opposed to manual bank payments or credit/debit card payments that require the customer to send the payment to the business (push-based).
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%) and B2C (14%) 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. According to GoCardless Market Research*:
44% of commercial UK enterprises say payment fraud is among their top concerns
1 in 3 businesses don’t identify a fraudulent payment for 2-3 days
1-2% of annual revenue of UK commercial enterprises is lost to fraud
McKinsey & Company state that open banking can drive enhancements in security in multiple ways, including; know-your-customer capabilities, identity validation and fraud detection.
Using AISPs, you can identify bad actors before they do damage to your business. You can also take advantage of the bank’s existing security measures like - multi-factor authentication and biometrics - 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.
YouGov consumer research commissioned by Deloitte revealed that among the technically-savvy there is latent demand for new banking services, making them the most likely to be the early adopters of open banking. This is echoed by PwC who states that “the more comfortable with technology a consumer feels, the more likely they are to participate in Open Banking”.
Open banking is gaining popularity among retail bank consumers even though many may not realise that the tools they are using are in fact, powered by open banking. According to the OBIE, 2.5 million people in the UK are now using services powered by open banking.
Open banking use continues to grow
The volume of calls to open banking APIs grew from 66.8 million in 2018 to 5.8 billion in 2020.
PwC predicts that by 2022, 64% of adults are expected to be using open banking.
Allied Market Research estimates the global market size for open banking to reach $43 billion by 2026.
In the UK, there are 289 regulated providers of which, 90 have at least one live proposition for customers. It can be expected that more products will become available in the near future.
These figures portray how commonplace open banking is expected to become and how consumer demand for these services will continue to grow. As open banking uptake continues on these trajectories, expect broader audiences to adopt open banking.
Although the UK is one of the leading countries in the development and adoption of open banking capabilities, many other countries are also making significant progress.
6. Staying competitive with open banking
So 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. Use cases of open banking from TPPs currently include; account verification, smoother payment processing and cash flow management.
As open banking technology uptake and consumer expectations for better experiences grow, being an early adopter of open banking in payments will be beneficial.
According to PwC consumer banking and payments sectors are the most likely to be disrupted by open banking. As more businesses invest in and lead with great open banking experiences, the demand from consumers will continue to grow. Large enterprise businesses cannot afford to miss out on this opportunity.
* GoCardless Market Research, February 2021, 250 Commercial Enterprises.