Try to describe Open Banking to a retailer can be a bit of a challenge. Retailers and bankers rarely share the same objectives and their perspective of what the customer wants is often like chalk and cheese.
In Europe, Open Banking is supported by a regulatory regime, the second Payment Services Directive (PSD2), which means that banks are required to share more customer information than ever before via Application Programming Interfaces (APIs). Banks will have to make available the necessary infrastructure through standardised interfaces that will be the starting pistol for greater competition and innovation.
API-led connectivity that defines the method for connecting and exposing data assets will be used to support retailers in connecting to Alternative Payment Methods (APMs), emerging payment methods and other payment-related solutions, such as loyalty, authentication/identity and fraud prevention tools. APIs are already providing cost efficiencies in integration and timelines as well as opening up new customer service channels, such as internet-enabled devices (smartphones and wearables), i.e. the Internet of Things (IoT). As these opportunities multiply, economies of scale that simplify the number of integrations, are expected to be provided by third-party service providers offering a range of microservices and revolutionary digital customer experiences.
At this stage, the retailer has usually fallen asleep. They have not fully appreciated the implications of Open Banking for their own business. Potentially, part of the reason why retailers have not embraced Open Banking is because they imagine it is a bank initiative for banks to create new banking services. This is true, but there is so much more to Open Banking.
Payment Service Providers are already preparing commercial solutions, whereby merchants will be able to take advantage of the new SEPA credit transfers (SCT) which supports instant “SCT Inst” payments. By using immediate payments rather than traditional card payments, merchants will not only receive their funds faster, but the processing fees are expected to be less than a card payment. Both online retailers, as well as traditional bricks and mortar retailers, will benefit from these features. Innovative payment solutions and potentially new overlay services are on the horizon that will take advantage of the fact that the underlying payment processing will be real-time. Call it instant or call it immediate, the genie is out of the bottle and Open Banking will be the catalyst. Payment services, such as Paym in the UK, or Swish in Sweden, which have predominately been personal to personal schemes. Similar mechanisms, designed for retailers, will be available to accept payments from consumers. These new overlay mechanisms will build on the real-time payment infrastructures, just as Paym is using the UK’s Faster Payments Service.
In China, we have seen new digital ecosystems specifically designed for retailers and serving retailers such as Tencent (WeChat) and Alibaba. Both of these examples have come from companies outside the financial services industry, whereas the incumbent European financial institutions hold the keys to the vault in terms of rich customer data as well as trusted client relationships. These banks are being mandated, through regulation, to hand the keys over to FinTech companies who view the opening of these customer data stores as an opportunity. It has been the non-bank FinTech companies who have already demonstrated market traction, such as WeChat, Amazon, Google, Apple, and have gained trust amongst customers by building strong relationships and presenting data in new forms. Some consumers believe they pay for their daily travel and groceries with Apple Pay, not with their Barclaycard. Even when their Barclaycard is embedded in the Apple Pay wallet. The wallet facilitates the transaction and provides a transaction history, and in many cases, there is a richer set of information compared to what is held in the mobile banking app.
The consumer is starting to see the value of these alternative banking and payment solutions provided by non-banks.
Take for example, Flux, one of the first Account Information Service Provider (AISP) firms to be registered in the UK with the Financial Conduct Authority (FCA). It was literally registered as soon as the FCA opened their doors to new Payment Initiative Services Providers (PISPs) and AISPs on 13 January 2018. Flux is providing a variety of digital services for both retailers and banks. Flux is integrating, for example, directly to mobile banking apps from Starling Bank, a leading UK challenger bank and is currently live in a closed pilot with Monzo, another challenger bank. Flux has also integrated its service with Launchpad, the Barclays’ platform for testing new services with real customers. Barclays Launchpad customers can choose to activate Flux and opt-in for paperless transactions at participating retailers, such as Costa Coffee and EAT. There are now 35 AISPs and 21 PISPs registered at the FCA as of 31 October 2018 – 16 of these are both registered as AISPs and PISPs.
This is only the tip of the iceberg and so much more is expected from Open Banking. Retailers must educate themselves of the world of possibilities beyond Account Information Service Providers (AISP), as defined by the PSD2, but understand the even greater possibilities that Payment Initiative Services Providers (PISP) are expected to provide the next wave of service innovation. Open Banking will allow retailers access to all of the major banks as the APIs evolve and become more mature. Retailers will be able to use loyalty programs to incentivise customers to initiate payments directly through their point-of-sale channels.
Brexit is not expected to alter the momentum which Open Banking is gaining, as the PSD2’s provisions are already enshrined in UK law, along with the GDPR. Both the UK Government and the FCA have indicated a desire to preserve banking and payment services compatibility. Furthermore, there is a strong linkage between Open Banking and GDPR because GDPR places the customer back in control of their own personal data. Open Banking will put control of banking back into the customer’s hands in a secure way.In summary, retailers should be more excited about Open Banking because of the following reasons:
- They will be able to create new customer experiences to buy products and services – for example, APIs will be imbedded in their existing point-of-sale channels (in-store and online) to enable improved account information services, such as current account balance display, electronic receipts and transaction history
- They will be able to initiate payments directly with the customer’s banks which will introduce better transaction processing fees and faster clearing of funds
- They will be able to generate relevant point-of-sale offers and discounts based on consumer spending habits and loyalty like never before
Edgar, Dunn & Company (EDC) is currently working with its clients to develop and design new and engaging, yet safe and frictionless omnichannel shopping experiences, placing consumers at the centre. Open Banking will give retailers the opportunity to accept payments directly from a consumer’s financial institution without the need for an intermediary, as well as let them access a consumer’s financial data. This will enable retailers to provide better customer experiences through flexible payment initiation and faster refunds, improving cash flow by bypassing the card networks and reducing processing fees, fraud and chargebacks that are associated with card payments.
Now that the retailer is interested in knowing more about Open Banking, the next question they will ask is when will this happen? Timing is a critical question – as to when will these new services be available for retailers. Flux is an example that is skirting around the edge of where the real benefits of Open Banking exist. There is a long road to travel and the adoption of Open Banking by the retailer community will be slow. It could be as long as 5 to 10 years before it will be experienced in the high street and shopping mall in your town – watch this space.