It's been more than three years because the introduction of open banking in the UK. While a lot's happened in the payments industry in that time, particularly in the last 12 months, we've only scratched the top of its potential.
Democratising banking services
With an upswing of neo and challenger banks recently, there has been a surge in the provision of accounts and services available in the finance market.
It's no more unusual for consumers to have multiple banking relationships for loans, charge cards and mortgages; and this has extended to the point where consumers are happy to have multiple bank accounts across different providers for their transactional accounts and day-to-day spending.
Indeed, the 'unbundling' of banking services has accelerated thanks to the growing wave of fintechs, with a focus on digital-based solutions, enabling banking to be delivered in a similar manner to software services – i.e. without having to set up an actual bank.
The barrier to admission to launch new banking services has lowered, yet still time the willingness of consumers to 'try out' new services from non-traditional providers has dramatically increased.
According to MoneyHub, 42% of monetary management platform users now have more than one bank account, while 65% of challenger bank customers continue to have accounts with their existing high-street banks.
Add to this the shift to e-commerce throughout the pandemic – which has increased the volume of online transactions, monthly subscriptions, and development of digital marketplaces – and the chance of consolidation services has never been clearer.
The case for additional choice
This is where open banking is necessary. Introduced in 2021, alongside new PSD2 regulation, open banking grants use of financial data to third-party developers (provided users give their permission).
By enabling non-financials to build up APIs around existing banking infrastructure, a host of innovative new services and applications are now improving the customer experience.
These 'universal apps' aggregate data across multiple accounts into one, easy-to-use platform, offering customers a 360-degree look at their spending and simplifying the ever-growing quantity of financial touchpoints we encounter in our lives.
In doing so, open banking has the ability to not only transform the way we track and understand our spending however the very concept of what a bank is and who can provide our financial services.
With the use case for open banking beyond question inside a post-COVID world, it won't be long until fraxel treatments replaces BACS payments – one of the most common bank-to-bank payment methods available today. BACS currently accounts for around 90% of all regular monthly payments via direct debit transactions.
Open banking allows aggregators for example payroll providers to make payments directly to employees rather than through BACS, disintermediating banks in the processing of direct debits and standing orders.
And the instalments revolution doesn't stop there. Open banking will also enhance real-time payments, going head to head with the card scheme to allow instant transactions between retailers and consumers.
Request to Pay
While UK consumers can already access faster pay on mobile to make real-time payments from one account to a different, open banking will take this technology one step further using Request to pay for (RtP).
As the name suggests, this means users can proactively request payments from other bank accounts. Debtors will receive a notification, using a mobile banking app or similar, detailing the amount owed and due date, thus providing both businesses and consumers having a simple, flexible way to reconcile accounts.
Needless to say, request to pay has the potential to revolutionise invoicing and regular payments. For debtors, RtP offers greater flexibility and convenience, by enabling partial payment options, a much better view of outstanding bills and a simpler way to pay.
Meanwhile, payees benefit from greater visibility over cash flow, which in turn can drive more accurate forecasting, reduced billing costs thanks to the switch to electronic invoicing and increased reconciliation.
In particular, retailers is going to be quick to adopt open banking technology, particularly for online purchases, thanks to its lower transaction costs, which should also ensure widespread acceptance among consumers.
By encouraging a greater volume of contactless and digital transactions, open banking can reduce the hidden cost of cash from mishandling, along with other inefficiencies, with cash-free payments estimated in order to save retailers lb7.2 million a year.
This transformation inside the payments industry couldn't be more timely, with the pandemic accelerating the shift towards online retailing as well as fundamentally changing the way we work, live and pay.
With consumers increasingly searching for payment solutions that fit around their lifestyle and provide better visibility of their spending, open banking is the unsung hero of current payments innovation and will be key to meeting these expectations inside a post-COVID world.
While it might not have made exactly the same waves as the rise of contactless payments or mobile wallets, open banking is quietly reimagining what we today consider to be a 'bank' – and that's just the tip of the iceberg.