How Can Open Banking Reduce Your Payment Costs?

Open Banking is a new way of taking payments – and it can substantially reduce the fees on customer payments. By allowing you to initiate a payment directly from your customers’ bank accounts, payments can be made instantly and without the credit card fees.

What is open banking?

Open banking allows businesses to initiate payments directly from customers' bank accounts, bypassing traditional card networks and their associated fees. This method enables instant, cost-effective transactions without the need for credit cards. By using open banking for payments, businesses can significantly reduce transaction costs and improve cash flow by processing payments in real-time.

It allows users to access new and tailored financial services. For example, many of us hold accounts at different banks or brokerages. Open banking means you can aggregate the information for all those accounts into one real-time dashboard of your choosing, so you can see all your money in one place.

How does it work?

Open banking refers to the use of APIs to share financial data and services with third parties. These third parties usually provide technology, a service, or an app to the bank’s customers that make use of the shared financial data and services. For example, the shared financial data might comprise of statements and transaction records belonging to the bank’s customers. This data cannot be made openly available, it is only shared at the explicit request of the customer. Open banking provides the technological infrastructure and legal frameworks to make such consent-driven sharing happen.

Benefits of Open Banking for Businesses

With 68% of businesses using open banking for their operations and customers, it’s already a popular choice. They’ve added it to a wide mix of payment options, with credit cards (90%), bank transfers (82%), and debit cards (76%) are also popular.

Open banking offers a range of benefits:

Reduced Transaction Costs: Open banking payments can be significantly cheaper than traditional card payments, as they bypass card networks and their associated fees. This can lead to substantial savings for businesses, especially those with high transaction volumes. As merchants reduce costs by eliminating card fees, these savings can be passed on to consumers, leading to lower prices.

Faster Payments: Open banking payments are processed in real-time, meaning that funds are transferred between accounts almost instantly. This can improve cash flow and reduce the time it takes to receive payments.

Increased Security: Open banking uses Strong Customer Authentication (SCA) for every transaction, providing an extra layer of security against fraud. This helps reduce the risk of chargebacks and unauthorised transactions.

Improved Efficiency: Open banking can automate various financial processes, such as reconciliation and accounting. This can free up time and resources, allowing businesses to focus on other areas of their operations.

Enhanced Customer Experience: Open banking can provide customer with more convenient and personalised financial services. This can lead to increased customer satisfaction and loyalty.

Access to New Markets: Open banking can help businesses to expand into new markets by providing access to a wider range of payment options. This is particularly beneficial for businesses operating internationally.

How to Avoid Credit Card Fees with Open Banking

For businesses, the biggest plus to open banking is the ability to avoid unnecessary credit card processing fees (find out more here). So, how can open banking help?

Account-to-Account payments: Open banking eliminates intermediaries in the payment process, leading to faster, cheaper and more secure transactions. It enables account-to-account payments, which bypass card networks and their associated fees. This could result in significant savings, especially for businesses with high transaction volumes.

Lower transaction fees: Open banking providers typically charge lower transaction fees than traditional card processors. This can help reduce the overall cost of accepting payments.

No Chargebacks: Open banking might significantly reduce the risk of fraud and chargebacks, but it does not eliminate them entirely. These payments are less susceptible to chargebacks, as they are authorised directly by the customer’s bank. This can save money and reduce the hassle of dealing with disputed transactions.

Regulatory Landscape of Open Banking

Naturally, open banking is subject to various regulations and standards, particularly in the UK and Europe. These regulations are there to promote competition, innovation and consumer protection in the financial services industry.

PSD2: The revised Payment Services Directive (PSD2) in the EU mandates banks to provide third-party access to consumer banking, transaction, and other financial data through APIs, after obtaining consumer consent. This has laid the groundwork for open banking in Europe.

UK Open Banking Standard: Following Brexit, the UK retained the stipulations of PSD2 and established the Open Banking Implementation Entity (OBIE) to oversee the implementation and development of open banking standards. The Financial Conduct Authority (FCA) regulates the financial services industry, including open banking activities, emphasizing consumer rights to data access and privacy.

Data Security and Privacy: Open banking regulations prioritize data security and privacy. SCA is a key requirement, ensuring only authorized individuals can access and share their financial data. Regulations like GDPR in the EU enforce strict guidelines on data usage, storage and sharing.

What’s Next for Open Banking?

Increased Adoption: As more businesses and consumers become aware of its benefits, adoption is expected to increase significantly.

Wider range of services: Open banking is expected to expand beyond payments to include a wider range of financial services, such as lending, investment and insurance. It could also simplify the process of applying for credit cards and loans by providing the lenders with a more comprehensive view of a consumer’s financial situation.

Greater Innovation: Open banking is fostering innovation in the financial services industry, and we can expect to see new and innovative products and services emerge in the coming years.

Enhanced Security: Security measures are likely to become even more robust, further reducing the risks associated with open banking.

What are the Risks?

Open banking might offer lots of attractive benefits, but there are also some potential risks to consider:

Data Security: Open banking involves sharing sensitive financial information, which could be vulnerable to data breaches if not properly protected. Open banking increases the ‘attack surface’ but also provides tools and regulations to mitigate these risks. Businesses need to ensure they have robust security measures in place to protect customer data.

Third-Party Risk: Open banking relies on third-party providers, which could pose a risk if they do not meet security standards or comply with regulations. Businesses need to carefully vet their open banking partners.

Regulatory Compliance: The regulatory landscape is still evolving, and businesses need to stay informed of any changes to ensure they remain compliant. This can be complex and time-consuming.

Competition: Open banking promotes competition in the financial services industry, which could lead to some businesses losing customers to new entrants. However, open banking can also help banks strengthen customer relationships by providing insights into customer needs and offering competitive products.

What do you Need to Get Started?

To implement open banking, you will need a software solution that manages your open banking functionality. This solution should be capable of integrating with your existing systems and providing a seamless experience for both your business and your customers. When selecting a software solution, consider the following:

Integration Capabilities: Ensure the solution can integrate with your existing financial systems and third-party providers.

Security Features: Look for robust security measures that comply with open banking regulations, such as GDPR and PSD2.

User Experience: Choose a solution that offers an intuitive interface for both your business and your customers to manage payments efficiently.

Finally...

Open banking is a game-changer for businesses, offering a range of benefits that can help improve efficiency, reduce costs and enhance the customer experience. Embracing open banking will help businesses to gain a competitive advantage, positioning themselves for success in the digital economy. There are some potential risks to consider, but the benefits far outweigh them, and the future of open banking looks bright.

A round-up of all the benefits:

Reduced costs
Avoided expensive credit card processing fees
Lower-cost account-to-account payments
Enhanced security (through SCA)
Reduced risk of chargebacks
Improved efficiency via automation (reconciliation and accounting)

These benefits contribute to a more streamlined and cost-effective business operation, allowing focus on growth and innovation. By carefully considering the pros and cons of open banking, and by choosing the right open banking partners, your business can unlock the full potential of this transformative technology.