EXCLUSIVE: “Access All Areas” – Kush Shah, Bottomline Technologies in ‘The Paytech Magazine’
Open banking could help consumers get hold of the cash they need to cover essentials as the cost of living spirals, says Kush Shah, Senior Product Manager for payments technology provider Bottomline Technologies
Having, hopefully, cleared the darkest days of COVID, now, indiscriminately, the UK faces yet another plague. This one is on the financial side. Runaway costs for goods and services, exponential increases in payments fraud and an economic downturn have combined to put immense pressure on consumers, particularly within vulnerable populations. For this latest crisis among several recently, payments technology is poised to add value and become a controlling financial factor in a chaotic environment. And the beating heart of that technology is open banking, which provides businesses with access to data, insights and new payment capabilities.
But before we unpack open banking in this context, let’s look at some numbers. First, the cost of living, according to the UK Consumer Prices Index, rose by 9.6 per cent in the 12 months to October 2022. From where did that increase stem? Right in the bread basket. According to the Office for National Statistics, that 9.6 per cent came from the housing and household services category (electricity and gas), food and non-alcoholic beverages, and transport (fuel). According to the BBC, the rise has already affected lower-income populations who have turned the heating off to save on skyrocketing energy bills. More than half (52 per cent) of UK adults say their households have found it difficult to pay essential costs over the last six months.
HOW CAN OPEN BANKING HELP?
It’s tempting to take the cynical approach here and say that the only way to fix a cash shortage is more cash. The more jaded among us will also say that data and providing more payment options for consumers is an empty strategy. But it’s not. Open banking gives banks and businesses an effective way to use technology to help consumers control their finances, by increasing the transparency of those finances and providing more ways to pay. Even the highest income levels would be interested in, and benefit from, open banking’s advantages. But those benefits are not limited to a specific demographic. For example, while preliminary research from Bottomline shows that failure rates for direct debits (DDs) in the insurance industry have surged, up 20 per cent from 2021, both in terms of volume and value, consumers at all income levels are feeling the crunch and cancelling luxury DDs compared to those covering essentials such as utility payments. But, in the current situation, open banking can be especially relevant for lower-income or gig-economy populations where managing their money can be challenging.
So, control comes first in this equation, followed by the payment technology enabled by open banking in the form of payment flexibility and, in time, variable recurring payments (VRPs). More about those further on in this piece. Open banking is best viewed in three stages: current use cases, short-term promise and long-term vision. Let’s use a hypothetical situation to illustrate a current use case. Suppose a financial institution (FI) in the UK has integrated open banking into its tech infrastructure. And one of the customer segments it tracks are the lower-income and contractor or part-time employee brackets, who it assumes are getting squeezed by high prices. That FI can analyse the data from that segment specifically. It can see the money coming in and the money going out and offer customers sound financial advice and revised credit scoring. The consumer can then avoid the anxiety that might otherwise push them towards high-interest credit cards or even loans that only add to a short-term debt burden.
In its current iteration, open banking also gives consumers more power over their finances when the economic climate most demands it. If, for instance, a payment is missed or a direct debit fails, open banking-based solutions like Pay Direct facilitate single, immediate payments. This gives consumers the option to pay directly from their bank account to a supplier or business at a time when it suits them. They can pay all or part of the amount due when the money becomes available in their account, providing ultimate flexibility. By using open banking, businesses can adopt a similar strategy. Suppose a large UK utility provider sees late or missed customer payments. It could employ collections agencies for the next few years and alienate those customers, or it could work to improve communication, offer cost-effective payment alternatives with flexible terms and adjust those payments to align with the customer’s complete financial status. After all, the more payment options businesses can provide, the easier it is for customers to ultimately pay.
VRPs AND SWEEPING
The Competition and Markets Authority announced in July that it would require the UK’s nine biggest banks – that’s the CMA9 – to implement variable recurring payments using APIs. It enables customers to approve, or ‘sweep’, money between their own accounts, promoting competitive products and services for borrowers, while also encouraging savings and enabling better management of finances. If consumers have cash deposited in savings accounts, it can be used to prepay loans or pay down debts for services that were paid on a regular weekly or monthly schedule. It can reduce outstanding balances and move a struggling household closer to financial management. Stretching beyond the scope of the current CMA mandate, VRPs should extend to regular payments for common services, including gym payments, subscription services and utility bills. This is the short term promise of open banking.
“More than half of UK adults say their households have found it difficult to pay essential costs over the last six months”
For this to happen, the banks need to open up, or develop, APIs for such use cases. Without doubt, pressure from the industry and regulators would go some towards helping this to become a reality Seen as complementary or as a substitute for direct debits or recurring card payments, VRPs will give banks and businesses a new way to collect payments of variable amounts from the same customer, on a recurring basis, without needing to gain permission for every payment. This is an important change to the current open banking situation, where third-party providers can only initiate single immediate payments, and customers must authenticate each transaction separately. With VRPs, the customer can agree to the payment parameters with businesses from which they are purchasing goods or services, and their third-party provider, and approve the payment mandate with their bank in advance. From then on, payments will initiate without the customer having to take any action. Let’s circle back to our original premise. Payment technology continues to find new use cases for banks, other verticals and consumers. Once available, open banking APIs should spur further innovations and adoption by banks and payment service providers.
As Charlotte Crosswell, chair and trustee at the Open Banking Implementation Entity (OBIE), wrote recently: “If history has anything to show, it is that – especially as far as British financial services are concerned – innovation is always part of the solution. Difficult economic times bring with them unique conditions, which allow innovators to think and move more freely to create rapid, impactful change. The UK is nothing if not innovative and, historically, it has demonstrated its ability to react agilely to a crisis, so that it can be turned into an advantage and emerge stronger than ever.”
And we’re just getting started. Longer term, we hope to see open banking’s Request to Pay come to fruition – the next level up when it comes to giving consumers control of their payments. But, for now, open banking payment solutions are starting to find very positive use cases as the UK’s population gets help when it’s needed the most.
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