What is Open Banking?
For decades, the provision of banking services to UK consumers has been dominated by a small number of large organisations, and it has been tough for new competitors to get a look in. However all that is changing, thanks to the introduction of open banking, which was introduced in the early part of 2018. Whilst it is hard to set out a precise open banking definition, open banking means that the detailed and highly valuable information which the UK’s nine largest banks hold about us – such as what we spend and where we spend it – can, with the customer’s permission, be shared more openly with other businesses. This presents exciting opportunities for innovative businesses to create new and useful services to help customers choose from a wider range of services, and make the most of their money. Below we examine five of the key impacts on the payment market.
1. It will help support ‘omni-channel’ models
Omni-channel businesses enable customers to enjoy the same experience through each of their channels – in-branch / on-line / app etc. In the era of opening banking, the removal of many restrictions on the free-flow of customer data will make it far easier for brands to align information and customer offers across each touchpoint, as well as across third party channels. And connecting the information up in this way means that it will be possible to personalise offers and issue them in real-time, creating a more efficient marketplace and an improved overall customer experience.
2. It will affect the way credit is offered to customers
Since the principal benefits of open banking are faster access to more customer information in greater detail, it will be possible to create an immediate and ‘up to the minute’ assessment of a customer’s creditworthiness, and apply it in real time to the transaction taking place. Not only will the customer’s eligibility for credit be immediately established, but it will be possible to carry out a near-instant audit of potential lenders who may be willing to extend credit to the customer, and at what rate. This could have significant implications for the credit card market.
3. It will enable direct settlement, helping improve cashflow
At present the flow of funds from customer to vendor can be convoluted and involve several parties accepting commissions for providing services which add to the security and resilience of the process. It has long been a frustration of businesses that their access to customers’ funds can be held up by as much as a week in order to ensure that fees and chargebacks can be accounted for. The existing card payment model requires the creation of a merchant bank account, which is run by the payment service provider, and not the business. However with the advent of open banking, the need for an intermediate step – the merchant account – is removed, and the process of settlement can be almost instant. So the critical issue of short-term cashflow will hopefully be improved.
4. It will improve customer acquisition
A long held principle of acquiring new customers is ‘right person, right message, right time’. With open banking a wealth of new insight is available to forward-thinking fin-techs, allowing them to create precise and reliable insights into customers, and offer them products and services which will be relevant and timely. New data revealing with greater clarity actors such as lifetime value, risk or price sensitivity can be accurately modelled and used to drive campaigns consistently across multiple platforms. Importantly, a key tenet of open banking is that the customer has control over what data they are willing to reveal, so the process is elective and fully consent-based.
5. It will help to reduce debt
Household debt has become a scourge of modern times, and with the inexpensive and highly accessible credit available today it is showing no signs of reducing. Just as the consumer credit market is being transformed by more precise and timely customer-level data, open banking is enabling lenders to carry out more meaningful assessments of potential borrowers, by overlaying data which will, for example, considers how a borrower’s circumstances might be expected to change during the term of a loan. It also creates opportunities for lenders to take a more active role in helping borrowers to manage other aspects of their personal finance, ensuring that responsible lending practices are upheld.
Open banking promises to have a transformative effect on business, and will greatly reduce the friction, cost and complexity of many of the services used by organisations and their consumers. Applied intelligently, it will have the effect of creating more choice and better value for consumers, whilst making it easier for organisations to locate and target their best-suited prospects. We are living in the age of the experience economy – an area which has arguably been sorely over-looked in some quarters of the financial services industry in recent times. However with creative and relevant propositions underpinned by greater quantities of richer data offered freely by customers, and exciting new era lies ahead.