How does open banking benefit businesses?

Whether it’s powering their investor experience, their car-selling platform, or their payments infrastructure, many organisations are already turning to open banking to meet their finance and administration needs. The guiding force behind many of Europe’s most promising new technologies, open banking is giving businesses more power to manage their money and information. And it’s only just getting started.

So how can companies take advantage of everything it has to offer? Here are just a few ways businesses can capitalise on the benefits of open banking.

Wait, but what is open banking?

Good question! Open banking is a broad topic, but it boils down to this: consumers own their financial data and can determine who has access to it. If a person wants to connect a budgeting app to their bank account, for example, they can now give the app authorisation to do exactly that. Customers maintain control over how much information they share, and companies can only retrieve or use that data if given permission.

For businesses and consumers alike, open banking has actually been a financial fact of life for years. It first came to prominence in 2015 with the proposal of PSD2, which put forward that regulated third party providers (TPPs) should be able to make payments and access data on their customers’ behalf.

A year later, the UK took things a step further when the Competition and Markets Authority (CMA) mandated that the nine largest UK banks not only had to comply with the regulations set out in PSD2, but also adhere to a shared set of standards in the form of APIs (more on that below). PSD2 officially came into law in 2018, bringing about open banking as we know it today.

How do TPPs access that financial data?

Using technology called application programming interfaces (APIs), these companies can connect to the banks and retrieve the appropriate information. 

A TPP’s regulatory status then determines what it can do with that data. If a company is registered as an Account Information Service Provider (AISP), it can fetch read-only financial data but cannot initiate payments. AISPs can then use that data to provide intuitive services, such as compiling all of a user's accounts into one dashboard or making savings recommendations. Payment Initiation Service Providers (PISPs), on the other hand, can make payments with the account holder’s approval.

What does this look like in everyday life? Say you offer a wealth management app. Your customers send money through your platform to fund their investments. Unfortunately, this is a big hassle. Users need to open their online banking app and enter their information manually. This may lead them to abandon the payment entirely. The payments that do get through get bogged down in reconciliation, costing you time and money.

Open banking payments remove the difficulty from this process. Users can initiate payments quickly from within your app or website, enabling a smooth customer experience. And businesses receive their funds instantly. No more fuss, no more waiting.

So what are the benefits of open banking for businesses?

Whether they’re accepting payments or just collecting data, businesses can unlock substantial open banking benefits. Here are just a few examples:

Payment APIs

Open banking offers a host of advantages compared to cards, manual bank transfers, digital wallets and other payment methods. These include:

1. Higher conversion rates: In ecommerce, for example, a better user journey means more purchases. By eliminating the need for tedious data entry, open banking payments provide seamless, mobile-first customer experiences.

2. Higher acceptance rates: Customers need to be confident their payment won’t fail when they reach the checkout page. Open banking can give them that peace of mind. Its transactions succeed more than 95 percent of the time, whereas cards face a five to 14 percent failure rate.

3. Lower fees: Processing payments can be a pricey proposition, but open banking takes cost out of the equation for merchants. Payment APIs lack both the transaction fees and operational costs of other methods. In fact, businesses can save up to 80% on fees compared to cards.

4. Faster settlement: Waiting for funds to settle is an inconvenience that many businesses hope to avoid. While cards and Direct Debit payments can take days for funds to settle, open banking payments provide instant settlement, ensuring that companies receive their money when they need it. Neobanks like Revolut already use open banking to ensure that companies receive their money when they need it.

5. No chargebacks: When customers dispute a charge, businesses incur more than just a fee. Chargebacks can pose a reputational risk to companies, affecting their payment processing rates in the future. Open banking payments don’t offer chargebacks, preserving businesses while protecting customers in other ways.

Data APIs

But open banking isn’t just great for collecting payments. By gathering financial information, it can help companies unlock these benefits:

1. Better understand your customers’ needs: A personalised customer experience is a great customer experience. Data APIs give companies more information about their users’ finances and habits, allowing them to offer tailored, individualised services. For example, fintech apps such as Plum use data APIs to identify spending routines and provide tailored savings recommendations.

2. Cut back on admin: Completing compliance processes used to mean manually uploading a ream of documents. Not anymore. With open banking, customer information is available automatically, saving time and administration expenses.

3. Onboard customers smarter and faster: Knowing your customer is always important, but in some industries, verifying accounts and identities is an essential part of doing business. Open banking lets companies check the authenticity of everything from bank information to customers' identities. Take CreditLadder, which uses data APIs to match their customers' identities with their current account information. This accelerates KYC processes while also cutting complexity and cost.

4. Get the whole picture on your finances: Running a small business often means juggling multiple current accounts at once. Software like Ember uses open banking to bring everything together in a single interface, streamlining your accounting and making it a breeze to track transactions.

Makes sense. But are there any risks with open banking?

One of the biggest open banking benefits is that it’s a safe and secure way to process payments and data. It helps businesses to not only protect themselves, but to ensure their customers remain safe as well.

Open banking is particularly effective against fraud. Bank authentication is baked into open banking, so TPPs don’t need to store sensitive personal information or passwords. This significantly reduces the risk of card-not-present fraud without impacting customer experience. And open banking transactions require strong customer authentication (SCA) for every purchase, making them far more secure than cards and other payment methods.

Strong regulations also play a significant role in protecting the integrity of open banking. PSD2 and the UK’s Payment Services Regulations (PSRs) ensure that only authorised companies can provide open banking services. This ensures that all TPPs protect their customers’ data, keeping open banking reputable and trustworthy in the process.

From protecting customers to paying bills, open banking has plenty to offer businesses of all stripes. And as it gains more traction, the benefits are sure to keep on coming. Want to know how to take advantage of them? We can help.

Book a demo to speak to an expert about how open banking can transform your payment experience.