Banking has traditionally been an industry slow to change. Our very concept of a bank has, until the last decade or so, remained consistent with the big, high street providers that define how we think of banks and banking.
Of course, the advent of digital payments and mobile banking quickly changed all that. But while we’re now used to banks as virtual entities, having moved away from making payments in branch, open banking is now redefining this understanding once again.
The rise of multi-banking
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 transaction 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
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.
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.
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.
These ‘universal apps’ aggregate data across multiple accounts into one, easy-to-use platform, offering customers a 360-degree view of their spending and simplifying the ever-growing number of financial touchpoints we encounter in our daily lives.
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.
Disintermediating the banks
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.
Savings for merchants
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.
Like the shift to online banking, we’re not going to give up the ‘new normal’ now that we’ve become accustomed to the benefits and convenience it brings. This means that the banking industry will have to break with tradition and quickly accelerate payments
innovation to keep up with the pace of change.
The good news is this revolution is already underway, as open banking continues to transform our understanding of what a bank is and how our financial services are delivered.