Open banking is set to have a major impact on the financial services industry. In the last few years, open APIs have gained traction and financial institutions are revisiting their channel and partner strategies accordingly. The revised Payment Service Directive, known as PSD2, is one of the driving forces behind this evolution.
The European Commission mandates banks in its member states to allow regulated Third Party Providers (TPP) to access the customer’s account information or initiate payments on behalf of a bank’s customer.
The PSD2 intends to create an environment where third parties and banks alike can innovate and deliver value added services to end users while still protecting the customer’s sensitive data.
To date, the impact of open banking on existing business models and infrastructure has mainly been a topic that kept bankers and incumbent fintechs awake at night. Where the banking community initially perceived this as a threat, it quickly became apparent that there are also a number of opportunities that arise from these regulations.
As banks and third party providers start to develop new offerings, the question is – who else would be able to benefit from open banking?
Looking at the types of third party services that were initially put forward, the focus was mostly on aggregating customer data in the context of personal finance management and on providing alternative payment options for online retailers.
On the other hand, in store payments could equally be based on account to account transfers and as instant credit transfers become more readily available across Europe, merchants will be able to create their own alternative payment options and bypass the existing cards infrastructure.
While this is a minor change from an end user perspective (the consumers will pay for their goods very similar to the way they would pay using their debit cards), the merchants benefit from having the funds immediately available on their accounts. Receiving the funds almost instantly might be appealing, but the true value comes from the fact that merchants are also able to receive their funds outside of the traditional banking business hours. As these payment initiation services bypass the existing card networks, this offers retailers the short term benefit of reducing cost as well.
But there are longer term benefits to be considered as well. By combining instant payments, open banking and existing loyalty schemes, retailers have a unique opportunity to understand customer’s buying behaviour better and to develop value added services leveraging faster, safer and more convenient payment options. There are already several examples in the market where consumers can use their own mobile phones to scan goods at a store and pay using that same mobile app without having to go to a physical point of sales. As retailers gain better insight into their customer’s buying behaviour, this opens the door to creating tailored offerings and increase customer loyalty.
When retailers manage to create a tangible benefit for their customers, it is only a matter of time before consumers will be willing to share more of their data (such as account information) to gain access to new value added services.
As the financial services market is moving towards a new business models and is working on a common understanding of the technical aspects of open banking, the time is now for the retail industry to start reflecting on the potential this shift is bringing to retailers and their customers.