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Open banking: The real step change for the global payments industry

By Mike Peplow, CEO at Paynetics UK

The pandemic has revolutionised the way we pay. The shift to contactless payments and cash alternatives continues to make headlines, as more and more transactions are made digitally. But the real step change for the global payments industry lies in open banking.

Unbundling payments

The rise of neo and challenger banks in recent years has led to a surge in the provision of accounts and services available in the finance market.

It’s not unusual for consumers to have multiple banking relationships for loans, credit cards and mortgages. And this has extended to the point where consumers are happy to have multiple bank accounts across different providers for their transactional accounts and day-to-day spending.

Indeed, the ‘unbundling’ of banking services has accelerated thanks to the growing wave of fintechs, with a focus on digital-based solutions, enabling banking to be delivered in a similar manner to software services – i.e. without having to set up an actual bank.

The barrier to entry to launch new banking services has lowered, while at the same time the willingness of consumers to ‘try out’ new services from non-traditional providers has dramatically increased.

According to MoneyHub, 42% of financial management platform users now have more than one bank account, while 65% of challenger bank customers continue to have accounts with their existing high street banks.

Add to this the shift to e-commerce during the pandemic – which has increased the volume of online transactions, monthly subscriptions, and growth of digital marketplaces – and the opportunity for consolidation services has never been clearer.

Creating more choice

This is where open banking comes into play. Introduced in 2018, alongside new PSD2 regulation, open banking grants access to financial data to third-party developers (provided users give their permission).

By enabling non-financials to develop APIs around existing banking infrastructure, a host of innovative new services and applications are now improving the customer experience.

Mike Peplow

Mike Peplow

These ‘universal apps’ aggregate data across multiple accounts into one, easy-to-use platform, offering customers a 360-degree view of their spending and bringing the ever-growing number of financial touchpoints we encounter in our daily lives under one roof.

In doing so, open banking has the power to not only transform the way we track and understand our spending but the very concept of what a bank is and who can provide our financial services.

The future of periodic payments

With the use case for open banking beyond question in a post-COVID world, it won’t be long until this technology replaces BACS payments – one of the most common bank-to-bank payment methods available today. BACS currently accounts for around 90% of all regular monthly payments via direct debit transactions.

Open banking allows aggregators such as payroll providers to make payments directly to employees rather than through BACS, disintermediating the banks in the processing of direct debits and standing orders.

And the payments revolution doesn’t stop there. Open banking will also enhance real-time payments, going head to head with the card scheme to enable instant transactions between retailers and consumers.

Request to Pay

While UK consumers can already access faster pay on mobile to make real-time payments from one account to another, open banking will take this technology one step further using Request to Pay (RtP).

As the name suggests, this means users will be able to proactively request payments from other bank accounts. Debtors will receive a notification, via a mobile banking app or similar, detailing the amount owed and due date, thus providing both businesses and consumers with a simple, flexible way to reconcile accounts.

Needless to say, request to pay has the potential to revolutionise invoicing and regular payments. For debtors, RtP offers greater flexibility and convenience, by enabling partial payment options, a better view of outstanding bills and a simpler way to pay.

Meanwhile, payees benefit from greater visibility over cash flow, which in turn can drive more accurate forecasting, reduced billing costs thanks to the switch to electronic invoicing and increased reconciliation.

Benefits for retailers

In particular, retailers will be quick to adopt open banking technology, particularly for online purchases, thanks to its lower transaction costs, which should also ensure widespread acceptance among consumers.

By encouraging a higher volume of contactless and digital transactions, open banking can reduce the hidden cost of cash from mishandling, and other inefficiencies, with cash-free payments estimated to save retailers £7.2 million a year.

This innovation within the payments industry couldn’t be more timely, with the pandemic accelerating the shift towards online retailing as well as fundamentally changing the way we work, live and pay.

This shift is likely to be permanent. We’ve all grown used to the ease and convenience of digital payments. As consumers and businesses alike come to demand more from their payment providers, the financial services industry must raise the bar for what comes next.

Fortunately, open banking is not only redefining our concept of a ‘bank’ but driving what’s possible in the world of payments over the next decade.

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