• Kush Shah, Product Lead at Bottomline


• 11.04.2023 01:15 pm
#OpenBanking

The UK’s cost of living crisis continues to crack on, straining the wallets and bank accounts of consumers and creating a tough market for goods and services. The consumer price index (CPI) posted a new high with a 10.4% spike in February and supply chain issues continue to plague companies trying to keep pace.

All of this is familiar to finance leaders in the UK. They have their own crosses to bear in the form of pressurized profit and loss statements. Higher interest rates, 4.25% at the time of this writing, have hobbled new mortgages and other loans and now four million UK mortgage holders face a higher monthly bill. Add a cutback in consumer spending, and it all adds up to a need for new strategies, new thinking and a new approach to innovation if growth targets are to be achieved.

Part of that strategy has its roots in what has been seen as a “nice to have” set of consumer innovations enabled by open banking. But here’s a news flash: Open banking is evolving rapidly toward “essential” status for UK banks as their customers struggle. And the price to pay for ignoring it just might be customer churn. In fact, a recent research report shows that 35% of people currently struggling with their budgets would leave their current banks if they could access personalized support elsewhere. And it’s not an empty threat. According to the UK Current Account Switching Service, 376,000 consumers switched banks during the 4th quarter of 2022.

UK consumers clearly want innovative solutions from their banks as they reckon with higher costs. Open banking is tailor-made for this moment in time and we see three factors that can help mitigate rising costs and drive further adoption.

Real-time payments: The banking industry has lauded real-time, or instant, payments for their speed and increased amount of account data. Agreed on both counts. In the open banking context, I see the operative value proposition as a window into liquidity and nothing could be more critical amid an economic crisis. Real-time payments and real-time reconciliation can be the difference between a consumer guessing that they have enough money to pay their direct debits and knowing they have the liquidity to meet their obligations. They don’t have to worry when a payment they received will clear – or even if it will clear. With real-time payments the financial position of a consumer or business is clear, immediate and flexible. And it leads to my next point about data and visibility.

Data and visibility: The way I see it humans love to be in control. Open banking provides that control and gives the consumer tools to see their current financial status and even protect it. In a cost-of-living crisis like this one, it’s essential. Has the utility bill been deducted from my account? Easy answer. Will I have enough in my account to pay the next one? Easy answer. Can I potentially negotiate with the utility company if I’m late? Well, that’s not an easy answer, but I can certainly have a more informed conversation.

It’s interesting to me that the open banking conversation has centered around data these past few years. And it’s still very relevant. We've naturally transitioned from open banking, starting with a limited scope of data and payments, and are now moving more toward open finance where businesses and consumers have an even wider array of tools for payments and data sharing. From a banking perspective, it provides similar benefits. Open banking opens the door to embedded finance. It improves the onboarding experience. It provides new options to evaluate risk and loan origination. It's increasing the number of providers in the market who have access to this data to make informed decisions and offer competitive products.

Business adoption: We hear a lot about consumers and open banking, but we don’t hear enough about businesses using open banking for their payments and data. The value proposition here is essentially going to be a reduction in costs. Instant or real-time reconciliation is part of it but understand that this also means that data is updated in real-time as is a company’s cash position. That’s a huge benefit. Also, when you're paying suppliers, open banking becomes an effective, automated method. On the other end, when reconciling as the receiver, you can offer that flexibility and reconcile in real time. We see great benefits and successes with our customers who promote open banking to their customers as the primary or preferred payment method. You see a massive uptake from their consumer base, with conversions ranging as high as 90%. Then there’s the data aspect. By having a consistent view of payments data and cash positioning, businesses can reconcile across numerous bank accounts and customer accounts. Nothing could be more important in the current environment where expenses are going up and total revenue might not be keeping pace.

The adoption of open banking as it surpasses its seven million user mark has been impressive. Consider the fact that 14 million British consumers now have accounts at digital-only banks, and 78% will use mobile apps for transactions, and I think you’ll agree with that sentiment. Also consider what I referred to earlier in this piece as the direction of travel for open banking. We have evolved quickly from awareness and education to growth. The conversation that started strictly about access and visibility of financial data has moved on to payments agility. It will continue to move in that direction.

On its way to higher adoption rates, the UK banking community needs to see open banking for what it is: a short-term tactic for mitigating the cost-of-living crisis and a long-term strategy for customer retention and innovation. “Nice to have” for open banking is over. It is an essential capability for banks as well as their business and consumer customers. Offer anything less and your customers will send you a message … by moving to one of your competitors.