Even though it’s early days for open banking there are already plenty of trailblazers offering new services, writes Huw Davies.
From forex to rental accommodation, personal identification to loyalty schemes, many customer experiences are starting to be transformed by the effects of Europe’s Second Payment Services Directive (PSD2) just months after it was introduced.
Low-cost travel currency provision, securing a new rental flat, buying goods online and viewing your complete financial position across multiple bank accounts have all become easier thanks to third parties taking advantage of the access the regulation gives them to customer bank details to provide new services. Innovation is alive and kicking and motivation to succeed is high.
For banks, initially concerned that PSD2 would allow others to come between them and their customers, the prize comes in keeping themselves at the centre of their customers’ digital banking experience. This will allow them to continue to collect valuable transaction data that will help them cross-sell and up-sell their own products and services.
For merchants and service providers, open banking promises to remove some of the hassle – known as friction – of registering new customers, recognising existing customers and completing purchases. It could also make it easier to make targeted offers and build loyalty.
Meanwhile, fintechs are hoping that the new services they can provide, such as bank-account aggregation, will capture the public’s imagination, helping them create new businesses.
The sheer variety and success of those already operating in the payments area proves open banking’s value.
Online property portals are developing open banking services that help both landlords and tenants kick off a new tenancy faster and at a lower cost. Traditionally, the first rental payment is often made by debit card, incurring high processing fees. The alternative is to set up a Bacs payment, which can involve visiting a bank branch and filling in forms. The whole process can take up to 10 days to complete.
For landlords and tenants alike, this can be too long and there’s no guarantee that any payment will ultimately go through. Meanwhile, the landlord may have lost alternative tenants. Savvy online property marketplaces will begin using open banking to take immediate payment directly from the renter’s bank accounts by end of year.
This approach not only circumvents the high fees but also cuts the amount of time it takes to make that first payment from days to seconds. Down the line, we expect these portals to incorporate identity and credit checks as well as recurring monthly payments into their solutions, removing further areas of friction.
In travel money and investments, there’s also plenty of activity. Caxton, for example, aims to remove the pain points associated with registering for and using a pre-loaded foreign-exchange card. These include high fees, delays in clearing the first payment from the customer’s bank account and the need to log into both bank and forex provider. Like the property portals, forex providers can take immediate payment directly from bank accounts, cutting the cost and closing the time gap from registration to live accounts .
Online investment services are also looking to offer similar services to streamline account setup and moving funds.
In all these areas, open banking is cutting the hassle and increasing automation, helping to bring down costs and improve the customer experience.
The scope of these services can and will be broadened out as open banking payment services take off and the simple-use cases are proven. Expect to see recurring and bulk-payment facilities that will take the strain out of volume transactions, as well as services that offer lending on the back of payments.
Allowing third-party access to bank data will open up the opportunity for far wider data aggregation than previously possible. Until now customer data was held in silos by different companies – banks, merchants and service providers. Post PSD2, those silos can be connected and the data within them pooled and analysed to create a richer customer picture. This can be used to offer new, relevant services and build loyalty.
There are many fintech and banking propositions that allow customers to view all their bank accounts from different providers in one place. At present, what you can do with the service is limited to views of account information. Soon, a more advanced version will allow customers to unlock the value of these services and act on the information – make payments between accounts held at different banks to pay off an overdraft, for example, or sweep money from a zero-interest current account into a savings account. Users will even be able to set up rules-based parameters around events that will automatically trigger money movement, helping them manage their finances better.
Similarly, loyalty programmes are more effective when they know more about a customer. Many are merchant-specific – think Tesco Clubcard or Boots Advantage. When the retailer can see beyond the customer activity within their own store they can make timely and relevant offers to tempt customers away from rivals to spend more with them. It’s no surprise, then, that we’re starting to see loyalty card providers expand the range of what they collect to include bank data.
Identity and verification
When it comes to identity, verification and authentication, cumbersome processes create friction, which is a huge problem. Passwords are the bane of modern life. But PSD2 promises to change all that. Consent to access relevant customer bank details need only be given once so forms for a car loan, for example, could be filled in automatically by the loan provider. This not only improves the customer experience – less paperwork – but because the data is coming from the bank it has already been checked and verified so the loan can be processed quicker too.
As identification and verification services mature and develop, recurring payments and subscription facilities will be added.
Open banking is a new way of accessing financial services. While today’s offers may be limited in their functionality, their providers have clear road maps for further development. Just as with other revolutionary processes and technologies, it will take time to see how far they will go. But open banking’s capacity to reduce friction, risk and cost as well as make processes faster and more efficient means it will undoubtedly become an important part of our everyday lives. It’s over to the innovators.
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