Open banking critical to retail Covid-19 recovery

By Robin Amlot

An international study of more than 1,000 senior professionals in the banking, lending, PFM, investment, and retail sectors by open banking provider Yolt Technology Services shows that two thirds (66%) of retailers using open banking are already deploying Payment Initiation Services (PIS), a technology crucial for the future of the sector.

Which financial institutions will benefit from increasing open banking take-up remains to be seen. An Economist Intelligence Unit report for Temenos based on an analysis of over 10 million online conversations in public forums about personal finance finds challenger banks are strongly associated with financial empowerment, but also twice as likely to be associated with security and privacy concerns when compared to traditional banks.

Payment Initiation Services offer a more secure and efficient payment method than traditional card payments. Consumers log into their bank’s digital portal to complete transactions, and therefore benefit from their security measures. This reduces transaction times and protects customer details more effectively than entering bank or card details into the retailer website.

Leon Muis, Chief Business Officer at Yolt Technology Services, said: “Digital technologies have been essential in keeping the wheels of business moving during the COVID-19 pandemic, and it’s been no different for the retail sector. Most shoppers have been making purchases from their sofa, rather than heading to the high street, so retailers have had to rely on their digital offering and experience to keep the virtual doors open. Open banking has been playing an important role, and that’s only going to increase as customer behaviours are altered for the long-term and second lockdowns come into force.”

Over half (56%) of retail companies not yet using open banking systems said they were strongly considering adoption. 47% of respondents said open banking would improve customer experience, while 40% said it would deliver greater customer insights and 38% highlighted improved efficiency.

When it comes to PIS in particular, these and other benefits could be profound – over six in ten retail respondents (62%) expect over £1 million per year in additional revenue as a result of utilising open banking technology, with a move to open banking saving millions each year in credit and debit card fees, for example. In addition, payments will be more secure as consumers have to log into their bank with every transaction – both retailers and their customers will therefore benefit from the bank-grade security of Secure Customer Authentication (SCA).

“We’ve seen before with contactless payments, for example, how a steady adoption rate can swiftly give way to mainstream use. Customers who today need persuading to use PIS may quickly come to demand it. At some point, the failure to offer it could mean not just missing out on the savings it brings to transaction costs but losing these sales entirely. The potential complexity and long lead times of PIS projects for retailers is not, therefore, an argument against open banking. Rather, it’s the strongest reason to start working on its implementation without delay.”

However, to make this a reality across the whole industry, the third (36%) of retailers not using open banking need to overcome one principal hurdle – their own reluctance. Criticism of the technology focused primarily on data privacy (44%) closely followed by complaints that bank APIs are insufficiently reliable (41%).

According to the EIU report, start-up, digital-first banks and investment services have come to market promising superior customer experience and innovative services, such as budgeting apps and automated, low-cost investment tools. But traditional banks still benefit from trust, reliability and a wider range of services. And increasingly, spurred on by new digital entrants, they are investing heavily in their digital capabilities.

Max Chuard, Chief Executive Officer, Temenos, said: “The new report, which analyses online conversations, reveals that in the battle for consumers, challengers and incumbent banks will need to meet customers’ demands for financial empowerment, enhanced digital experiences as well as safety and security. We see digital technology as a once-in-a-generation opportunity to deliver satisfying and secure customer experiences and generate growth for banks.”

The analysis found that 13.7% of conversations about challenger banks included associations with concerns about safety, security or privacy, compared with only 6.7% of those about traditional banks. Discussions about “investment” have grown in frequency since 2015, and the analysis shows that 14.4% of conversations that discuss challenger banks include associations with financial empowerment capabilities such as tracking and budgeting, compared with just 2% of conversations that discuss traditional banks.

While many consumers are turning towards open banking and disruptive fintech platforms for enriched tools and services to bolster their personal finances, traditional banks remain heavily associated with rewards and loyalty programs — one of the most discussed subjects overall. A quarter (24.9%) of conversations about traditional banks were related to credit cards or reward programs, compared to just 2.4% of those involving challengers.

Jason Bates, co-founder of app-based banks Monzo and Starling, as well as 11:FS, a FinTech consultancy, comments in the report: “Innovators are those who understand the ‘brutal realities’ of customers’ daily lives. We never ask customers, ‘what would you like us to build?’ because they are experts at talking about their problems and experience, not product development. Our approach to creating new digital services is to talk to customers about the issues in their daily life and then look at how you can deliver against that.”