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How open banking can help businesses cut costs

It is no news that Open Banking is fundamentally changing the financial landscape. The second Payments Services Directive (PSD2) mandates that – with the customer’s consent – banks must share consumer banking information with licensed third-party providers (TPPs). As a result, PSD2 is stimulating companies to offer new services that are more convenient for clients and remove additional costs for businesses.

The main areas for cost reduction are through payments using Payment Initiation Services (PIS) and information sharing through Account Information Services (AIS).

Reduced payment costs through PIS

One of the main advantages of PSD2 is the cost reduction for transactions. Transaction costs are a key problem businesses face as they find ways to improve processes and recover from the effects of Covid-19.

PIS allows consumers to instantly and securely transfer funds between bank accounts and make online purchases. When a customer uses PIS to make a purchase, it costs the merchant a fraction of traditional card transactions. Payment Initiation Service Providers (PISPs) offering payment services to businesses often charge a flat fee of few euro cents per transaction, unlike credit card payments that charge a percentage of the transaction cost. This flat fee structure becomes cheap and highly competitive above a fairly low purchase price threshold, particularly for large volumes of transactions where traditional processing costs begin to add up.

PIS is also very competitive for high-value payments above €40 to €50, when you compare its low fees with the costs of using traditional payment providers. Due to the frictionless character of PIS, online merchants can also increase their conversion and payments acceptance rates by enabling their customers to pay via PIS at checkout.

PIS is instant and highly secure, which helps to reduce additional costs related to payments processing. When PIS is used for a transaction, the customer’s bank details and credentials are not shared with the merchant or business. This offers added security over traditional payment methods. Customer credentials are kept secure within their banks, reducing the need to disclose them to third parties.

Flexible payment options improve business efficiencies

Perhaps the fundamental benefit of open banking is that financial institutions deal directly with each other via API, such as a merchant’s and a customer’s bank, for example. This eliminates the need for intermediaries adding cost and time to transactions. This innovative leap reduces the number of steps needed during transactions, which means faster and cheaper transactions for the payee and potentially for the payer as well, where savings can be passed on to customers.

Innovations like Request-to-Pay enable businesses to send electronic requests for payment to their customers. These new services are designed to deliver more flexible payment options and make transactions easier for businesses and consumers. They also reduce the risk of non-payment and the additional costs associated with that.

For instance, an energy supplier can use AIS prior to making a one-time payment request. By extracting individual or company account information like transaction and balance data, the supplier has an insight into the right moment to initiate a payment. Businesses can thus use AIS as a part of their open banking toolbox for more efficient payment systems and processes.

PIS is also beneficial for cash flow. Payments made via PIS are instant, and businesses that use their instant payment capabilities have greater control over their cash flow and more accurate cash flow forecasting. PIS can also reduce the risk of fraud and chargebacks. When you compare instant payments via PIS with its traditional alternatives that take a considerably longer time to clear, open banking has the potential to accelerate supply chains and shipping times when payments are received immediately in this way.

Information sharing for better financial services

Transaction and balance data shared via AIS has the potential to aggregate and democratize account data for better financial management practices. When businesses and financial institutions immediately access a person’s or a company’s financial information (with their consent) the time to set up a new financial service, such as a loan approval for example, can be greatly reduced.

AIS can also feed transactional information to accounting software in a mores standardised forma, which can lead to a huge reduction in time for loan approvals.

New financial products and improved affordability assessments

Banks contain a wealth of information and insights on their customers. However, without PSD2 and AIS all these insights remain locked with siloed financial institutions. Third parties could benefit substantially from this data to determine the creditworthiness of their customers. When this data is externalised with the customer’s consent, it can be combined with other financial data to do real-time affordability assessment, create more competitive financial products and even extend more loans to help businesses weather the economic downturn caused by Covid-19.

As the sharing of information through AIS increases, banking data can be used to create new products, such as insurance, credit checks, supplier payment services, and funding platforms. These new services enabled by PSD2 also have the potential to be more competitively priced and more closely aligned with customer’ needs.

Access to customer financial information also holds the potential to improve third party services, such as price comparison websites. Combining open customer information with financial products can provide a much easier and more tailored assessment of complex financial products.

Open banking offers a route to recovery

Small to medium-sized businesses in all industries have been hit the worst by the effects of Covid-19. Significantly fewer customers, uncertainty over reopening plans, and having to rapidly adapt business practices to meet government restrictions has put many businesses in a critical make-or-break situation.

For businesses recovering from Covid-19, saving costs per transaction through PIS and having access to customer financial information via AIS are two powerful tools that can help them cut costs at a critical time. What’s more, PSD2 innovations can even improve their business processes through information-sharing and flexible payment options.

Interested in learning more about Open Banking? Download our report.

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