What is Open Banking?

Open Banking is the go-to buzz word in the finance world right now, with many referring to it as ‘the future of banking.’ Our guide has been created to help understand Open Banking, how it can help your business and prepare for the future implications it may have on your company.

Following the PSD2 (Payment Service Directive) the Competition and Markets Authority (CMA) called for a reform in how banks handle financial information. The reason behind this was to inject innovation and competition into banking sectors, meaning customers can make informed decisions when it comes to their money, resulting in better products and allowing customers the ability to manage money more efficiently.

Opening Banking means that all UK regulated banks share customer financial information such as;

• Spending habits
• Regular payments
• Bank balance
• Credit card balance and payment history
• Savings

In payment terms Opening Banking allows the customer and business to securely share data, including payment information, which means it can be used as a new and alternative payment method.

The majority of high street banks and building societies provide Open Banking payment solutions, these can be found on the Open Banking Directory. There are two types of authorisation associated with Open Banking;

Account Information Services allowing the customer to see their various different banking accounts and credit arrangements in one place, helping them to budget. An example of this is combining all accounts together in a budgeting app or adding accounts to your existing banking app. In simple terms, it’s an information sharing facility making it easier to manage your finances.

Payment Information Services allowing customers to pay companies directly, unlike card transactions this doesn’t require the use of a third party such as Visa and Mastercard. This is applicable for both face-to-face transactions and online ecommerce payments. Open Banking authorises payments using face recognition, making it a secure way for customers to make payments and reduces risk of fraud.

Since the start of Open Banking in 2018, we have only scratched the service of its ability and how this translates to business. Opening Banking offer transparency to both businesses and customers, allowing everyone to manage funds efficiently meaning we can make informed decision together in company and personal banking.

Unlike other areas of Europe, the UK is slower in the uptake of Open Banking when making face to face transactions. Technological advances mean that Open Banking can be used in retail, hospitality and for staged payments in replacement of a credit agreement.  Open Banking can be a payment option at point of sale, streamlining the customer journey and allowing retailers to offer a more personal and flexible solutions.

When accepting card payments, there is a delay between the payment being authorised at point of sale or e-commerce and the business subsequently receiving funds to their account. Depending on the risk of your business this can be anything between five working days and faster next day settlements, which can often cause cashflow issues for industries such as motor trade businesses or travel firms who rely on receiving settled funds quickly. Speed of having those funds in your business bank account is a huge selling point for Commercial Open Banking. Open Banking has also illuminated problems commonly experienced within card payments such as chargebacks and PCI Compliance issues.

Sharing customer data and establishing spending habits allows businesses using Open Banking to tailor offers and promotions to specific customer requirements. For example, spending is ordinarily higher in the first week of the month, after payday. To entice customers to maintain these habits within your outlet you might choose to send offers directly to them.

First of all, it’s important to remember that Open Banking can only be used for cleared funds – meaning we can only make comparisons based of debit card transactions. At Merchant Advice Service we always suggest assessments are made on a pound for pound basis. Having said that, there is no doubt that for some companies accepting Open Banking could make undoubtable savings – we’ll look at that in more depth later next.

Open Banking enables data to be shared in a way which allows suppliers to set up customer staged payments. This fills a gap when it comes to credit card payments and can be a cheaper way to accept transactions compared to the likes of PayPal credit, Klarna etc. Payments are normally set up in a three-stage process, allowing longer for your customer to pay for more costly items. Each stage of the payment will be charged at either a fixed pence per transaction or percentage – depending on your supplier.

Open Banking enables data to be shared in a way which allows suppliers to set up customer staged payments. This fills a gap when it comes to credit card payments and can be a cheaper way to accept transactions compared to the likes of PayPal credit, Klarna etc. Payments are normally set up in a three-stage process, allowing longer for your customer to pay for more costly items. Each stage of the payment will be charged at either a fixed pence per transaction or percentage – depending on your supplier.

Merchant Advice Service have chosen to partner with a number of Open Banking firms that share our ethics and no-nonsense approach when it comes to service and pricing. To find out more and how Open Banking can work for you speak to our experts today.