Marketplaces: 5 reasons to care about open banking

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Jiun Yi Tan, Account executive
26 Aug 2020

If one gauge of whether a trend is close to tipping point is that it’s already being used to cover a multitude of similar but subtly different ideas, then marketplaces — multisided online platforms that connect sellers and buyers — have definitely reached that stage.

By 2024, marketplace transactions will account for 70% of all transactions and exceed $7tn in sales, according to iBe. The shift to online commerce is nothing new, but the global pandemic has accelerated the trend, as retailers around the world were forced to sell online or stop business altogether.

Consumers meanwhile are turning to marketplaces more frequently, with the average UK shopper making almost four times as many purchases from a marketplace than from an online retailer this Spring, according to this research from Adobe.

The challenge for operators

For marketplaces operators, success brings with it a number of tricky operational challenges.

Competition between suppliers and sellers is increasing and shopper expectations are higher than ever. Operators need to widen their offering to keep shoppers happy while attracting the right suppliers.

They also face a relentless battle against fraud (the cost of chargebacks is estimated to be $40bn annually and growing), and soaring operational costs.

In our discussions with marketplace operators, we hear the following issues again and again:

  • How can I efficiently onboard trusted sellers?

  • How can I keep my sellers happy to ensure supply?

  • How can I keep fraud and chargeback risks to a minimum?

  • How can I keep my consumers coming back for my service?

  • How can I effectively manage my operational costs to meet all of the above?

So, how can open banking help?

PSD2, the pan-European Regulation, which has spurred global open banking initiatives and regulations, came into force in January 2018 (although implementation has taken longer in most countries). These regulations open up access to financial data and direct-from-bank payments for operators.

Open banking has already transformed the fintech industry in Europe. Neobanks, wealth management providers and accounting firms have all demonstrated that third parties can leverage consumers’ longstanding trust with their banks to access financial data, to build a new breed of personalised services and frictionless payment experiences.

But how can online marketplace operators take advantage? We see five promising use cases for open banking in online marketplaces:

  1. Instant merchant verification ✅

    Onboarding new merchants to a marketplace can take days: many operators outsource verification to third parties, introducing more friction and delay. Open banking APIs allow operators to optimise their KYC / KYB process with instant merchant verification, matching bank account data such as full name and transaction history, so trusted sellers can be up and running immediately.

  2. Helping sellers to manage cash flow 💸

    With open banking, sellers get paid more quickly. Operators can enable instant payouts to sellers since there’s no need for them to manually verify the seller’s account before triggering a payment. Operators can also use open banking to tap into merchant transaction insights, enabling them to build value-added services – for example offering cash advances to sellers whose takings are down in any given month.

  3. Account-on-file payments 📄

    Open banking payments go directly from the buyer’s bank account to the seller’s bank account, removing the need to use card networks (or manage associated PCI compliance). And since these payments are irrevocable, there’s no chargeback risk. While open banking infrastructure itself doesn’t support refunds, providers like TrueLayer are building on top of open banking APIs to allow instant refunds for a closed-loop solution.

  4. Personalisation🧍

    Open banking can give operators the insights they need to grow their business and develop more customised services. For example, categorised data on consumer transactions can help them understand share of wallet, while data on spending patterns, savings and income could help them target shoppers with relevant products, services and deals when they’re most engaged.

  5. Fraud-proof and cost-effective payments 🛡️

    Open banking payments can drive significant cost savings for marketplace operators. Since account to account payments are much cheaper than card payments, the more shoppers that opt for this payment type at checkout, the more operators and merchants will save on transaction fees. Account to account payments are also irrevocable and rely on the banks’ own security, minimising costs associated with reconciliation and chargebacks.

Open banking will improve the marketplace experience for buyers, sellers and operators alike.

The potential for growth in online marketplaces is huge. Most are only beginning to realise their potential — and open banking can help operators to unlock that value. It’s an opportunity to improve the marketplace experience for all parties, build trust in the platform and increase loyalty while reducing friction and cost.

Connect with me on LinkedIn or email to speak more about your open banking project.