By Andrew Gilboy
Open banking is the transformative next step in banking and payments, and businesses and consumers alike need to understand what it is and how it works. However, before providing an open banking primer, I'll discuss something familiar that open banking will affect: subscription services.
Like me, you probably use a lot of them—perhaps more than you realize. The 21st century economy is built on them. We pay to stream movies, TV shows and music. We pay to read online news publications and download audio books. We pay for apps and cloud storage services. We pay for weekly meal kits and monthly outfits. The companies that make this possible rely on recurring payments.
But recurring payments are challenging, and the current methods of receiving them have major drawbacks for merchants. Credit and debit cards are expensive for payment acceptance and have high failure rates. They're also inadequate for international B2B payments, because only a small percentage of companies use them globally. Wire transfers are expensive and slow. Open banking will reduce many such obstacles for companies that rely on recurring payments. It will spur major innovation in banking, too. So, what exactly is it?
Open banking is designed to open up banking data to give consumers and businesses access to better services that can save them time and money. Open banking has many uses, but they primarily fall into two camps: providing a better overview of an individual or company's financial position and creating a new way to pay.
Whether you're a merchant or consumer, your data can be shared via open banking only with your express permission.
If you're a B2B or B2C subscription business, the benefits of open banking—particularly open banking payments—are significant and numerous. For one, you can rely less on credit cards and all of their attendant processing fees and churn. Credit cards expire every few years; people lose or cancel them. All of this creates significant churn for companies that collect recurring payments. Perhaps more importantly, open banking will make it easier for global subscription companies to do business in countries that have low rates of credit card adoption—which, outside of the United States, are many. For example, in Europe only about 5 percent of companies use corporate cards, making it expensive and inefficient for global B2B subscription-based companies to do business with the majority of European companies.
There is an obvious and immediate benefit to consumers who don't use credit cards. According to Statista, 83 percent of Canadians and 65 percent of Americans have credit cards, but only 41 percent of the French, 20 percent of Brazilians and 3 percent of Indians do. Open banking offers these consumers a bank-to-bank payment alternative they may prefer. Open banking is also more secure because customers and merchants are transacting directly, and consumers must authenticate themselves through their online banking platform to authorize an open banking payment.
Not only will open banking revolutionize payments—it will also enable innovation in the banking sector in general. Just as a third-party company might look at your 23andMe results and fitness tracker to make personalized recommendations for sleep, diet, exercise and healthcare based on your genes and daily habits, open banking will enable a new generation of apps that can make smart, individualized financial recommendations based on a holistic portrait of your banking and spending habits. It can also help lenders make more fair, informed decisions.
Other countries have adopted open banking because of legislative deadlines. Their governments know it will spark innovation in financial services to provide better outcomes for consumers and businesses and increase the speed and simplicity of business transactions. Credit cards used to be the only game in town, but that will change rapidly in the next few years. Their replacement will be fueled primarily by global companies with recurring revenue models that will be eager to take credit cards—with all of their attendant fees—out of the equation. It's going to represent a challenge for credit card companies— one that will be welcomed by businesses and consumers alike.
Andrew Gilboy is general manager, North America at GoCardless. Contact him at firstname.lastname@example.org.
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