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Eight advantages of open banking payments for any business

Also known as Payment Initiation Services or PIS – open banking payments is a fast, transparent (in terms of pricing), and secure payment method, directly between two bank accounts.

Benefits of open banking payments

In this post, we share a selection of reasons why businesses of all types – retailers, lenders, utility or subscription-based companies, or any other type of business, should consider adopting open banking as a payment method. Some of them, such as lower costs and reduced fraud, are quite straightforward. But others - such as future innovation and the flywheel combination with Account Information Services (AIS) - are less obvious but can come with an even greater ROI.

1. Lower your cost of doing business

Card processing comes with three fees – an acquirer mark-up, a card scheme fee, and an interchange fee – which are paid for indirectly by customers in the form of higher prices. Likewise, BNPL providers make money from the transaction fees they charge the retailers.

But with open banking payments, there is no third party in the payment flow that needs to take a cut in the way credit card companies or other payment methods do. This means the cost per transaction is a lot lower for the business – in some cases up to 90%.

Ultimately, this lowers the cost of doing business, and enables you to either make more profit, gain pricing power or reward your customers.

2. Provide a seamless, secure payment flow for your customers

If the payment flow is not simple and intuitive, your gains on transaction fees may be cancelled out by a sub-optimal payment flow which hurts conversion at the checkout.

Open banking payments redirect customers to their trusted bank environment, where they pay in their usual way with a fingerprint or facial recognition, with all payment details pre-filled for quick and easy approval. After approval, you receive instant payment via UK Faster Payments or SEPA transfer.

With a shopping cart abandonment rate still nudging 70%, improving clunky payments experiences represents a significant opportunity to convert sales.

3. Reduce fraud

The sudden acceleration in online spending due to the pandemic has prompted a rise in online payment fraud - in 2020, this cost an estimated $35.54 billion globally. To combat this, government bodies such as the UK’s FCA are beginning to mandate two-factor authentication. But while this will increase online payment security, it has the potential to negatively impact conversion, due to more steps at the checkout. However, with open banking payments you already authenticate with your bank credentials – making it extremely difficult for fraudsters while maintaining the seamless checkout experience outlined in point two.

Furthermore, for retailers and businesses that sell physical goods, chargeback fraud - when a consumer makes a purchase, and then fraudulently requests a chargeback from the issuing bank after receiving the item – is a big issue. But that is not possible with open banking payments, as the business is in charge of reversing a transaction.

4. Benefit from faster cash flow

With open banking payments, funds can be validated and transferred almost instantly anywhere in the EU or UK, no matter whether the transaction is cross-border or domestic.

Instant settlement is a huge advantage for almost any business, but especially for those with physical goods such as retailers, as it is in effect payment in advance for the goods the customer will receive, which can then be invested elsewhere. Likewise, instant payments can reduce the need for - and associated costs of - business loans.

5. Sell across Europe

Open banking payments is a pan-European payment method. As the barriers to trading across borders become ever lower, this payment method has the potential to become a standard across all EU and UK markets. This can potentially be of great benefit especially to smaller businesses as they look to expand with minimum investment.

6. Set and forget with recurring payments

If you are a utility, leasing or lending company, or a subscription-based service provider, and require your customers to pay a set amount each month, a percentage will forget to pay or be unable to pay when they want to. But with open banking payments, you have the possibility to offer recurring payments – enabling your customers to automatically pay a consistent amount on the same day each month. This improves conversion, but also the customer experience, as it is one less task that your customers need to take care of.

Furthermore, with recurring payments there are reversed direct debits by customers and no unnecessary messing around with Direct Debit mandates, as the payment is effectively a standing order from the customer account.

7. Buy into innovation

Open Banking and PSD2 regulations and innovations are not standing still – they are evolving to nurture more innovation and competition in financial services on an ongoing basis.

For example, in late July 2021, the UK Competition and Markets Authority (CMA) required the nine biggest UK banks to implement Variable Recurring Payment (VRP) APIs to enable customers to sweep money between their accounts. “Sweeping” means that banks must enable the transferring of money between two accounts belonging to the same person – it is also known as “me-to-me" payments. This will enable personal finance apps and other financial services to further personalise offerings for individuals.

In the future, further innovation in the UK and EU both is likely. So when you are considering open banking payments, you are not only buying into what is possible today, but what may become possible in the future.

8. And finally, gain from a flywheel effect with account data

A “flywheel” is a type of mechanical wheel that can continue to turn by itself once it reaches a certain momentum. In business, the concept is that different initiatives can reinforce one another – and build up their own momentum.

A version of a flywheel is possible with open banking – especially for businesses such as utilities and lenders. On the payments side, you can improve conversion by offering automated recurring payments, or – if they miss a payment – following up with a QR code or text message that redirects your customer directly to their in-app bank environment.

The improved conversion will reduce debt recovery costs – a big drag on expenses in these types of businesses. But wait, there’s more. With Account Information Services, you are able to offer them the right product based on their financial profile, identify which days of the month your customers are most likely to have their account balances topped up and bill them in the 24-hour period after that. This should in turn further increase your payment conversion, reduce the costs of debt recovery, lower the cost of doing business, and so on.

Educate your customers and grow

At scale, rescuing a few basis points of failed payments can be worth hundreds or thousands, or even millions per year. But rescuing failed payments is only one way to optimise this critical business function. The cost embedded in each transaction, through fraud and transaction fees, also needs to be compensated in higher prices and/or lower profits - representing another valuable chance to optimise.

These benefits outlined above demonstrate that there are many ways for businesses to grow through open banking payments – and businesses and customers of all kinds can benefit from these innovations. But in order to gain critical mass, businesses need to 1) make sure they offer this as a payment option, 2) educate their customers of the benefits, 3) perhaps (partially) pass on the lower cost of the transaction to their customers, and 4) select the right partner.

Find out more below.

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