How will Open Banking impact retailers and consumers?
Retailers should be excited about the new world of Open Banking because it will give them the opportunity to cut their cost of payments. That’s the view of UK challenger bank, Starling, which points out that currently retailers have to pay a fee to accept card payments, but the new legislation will enable them to connect directly to banks to accept payments and so costs will disappear.
“They will no longer have to pay fees to a merchant acquirer (e.g. Worldpay) and card provider (e.g. Mastercard) for each payment, which currently costs them 20bps-30bps per transaction,” says Megan Caywood, Chief Platform Officer at Starling Bank.. “More likely, however, most retailers won’t want to become regulated to initiate these bank payments directly and do the technical work to implement it, but will rather use a payments aggregator, who will charge a fee but at a fraction of the price of their current costs.”
Recent Which? research showed that 92% of the public hadn't heard of Open Banking. Why should consumers be excited about this initiative? “The purpose of Open Banking is to drive innovation and competition in the market, so that customers have better options (lower prices and better product experiences) and more transparency around those options. The CMA did an analysis of the banking industry and found that banks structure their fees in ways that are too complex for customers to easily understand how much they have to pay, much less compare products to find the best one for them,” Caywood says.
She adds: “This legislation will drive transparency to give customers clarity on fees and pricing and help them understand their options, and also enable other FinTechs to connect to banks via application programming interfaces (APIs) so that they can create new tools and services for customers. This is just the beginning though; the most exciting part of Open Banking is that it’s enabling innovation we can’t predict. A community of developers can inevitably innovate better and faster than any one company alone, and by opening up bank APIs, it means that this wider community can now innovate in the banking and payments space, meaning lots of new tools, products, and experiences will be created to improve people’s lives.”
Q&A: Other burning Open Banking issues
RTIH: Starling Bank has commented that Open Banking is “a space that is still largely unexplored for many in our industry”. Why is this?
MC: Open Banking is the requirement for banks to open their APIs to enable third parties to access them and build new tools on top of them. APIs have fundamentally changed the way software is built and bought in tech and led to an explosion of innovation, but this innovation hasn’t been seen in banking as banks previously haven’t been willing to open up their APIs (the first and only example to date is Starling Bank, with our open APIs that we launched in spring of this year).
Since no other licensed bank in the UK has yet launched a set of open APIs, it’s still an unexplored space for many and most are just inching along, at the pace mandated by regulation. Similarly, because most banks are yet to open up their APIs, that means that the innovation that can be created as a result is yet to be seen. Open Banking will be mandated from January 2018, so we’ll soon see a lot of exciting developments in this area.
RTIH: In addition to Yoyo, what other partnerships have you announced in this area?
MC: Since we launched our API last April, we have created live integrations with Moneybox (ISAs), Tail (Loyalty), Flux (Receipts & Loyalty), and Yolt (the current account aggregator). We have many in the works, we’re excited to be rolling out more soon, so stay tuned.
RTIH: A study from Ovum highlights how PSD2 will be the catalyst for both a decline in card transactions and an uptake in direct and frictionless payment methods such as instant payments in Europe. It also shows how instant payments under PSD2 will change the way consumers pay for goods and services, revolutionising e-commerce. What’s your take on this?
MC: PSD2 and Open Banking will enable third parties (e.g. retailers) to accept payments via connected directly to bank accounts via APIs, skipping over card providers to enable the transaction. This will save retailers money so it’s likely to have good uptake, and as a result lead to a decline in card transactions. The regulation will also enable things like recurring variable mandates, so a user could hypothetically authorise Amazon to set up one of these mandates and charge their account (without reauthorisation) for payments under a stipulated amount. This means that instant payments could be made, directly from the customer’s bank accounts, and without re-authorisation for each payment.
RTIH: Jumping ahead 12 months, from a consumer point of view, what will Open Banking look like this time next year?
MC: You’ll be able to securely share your data from your bank to third parties, and will be able to access a new range of products and services created upon these APIs. If the payments portion of the regulation is implemented by this time, they’ll have new ways to pay online and may experience lower costs as a result. They’ll be able to use aggregator apps to see all of their transactions in one place, and from within Starling Bank they’ll have a marketplace of options of financials services that they’ll easily be able to access and connect to.