December 17, 2020


Open Banking: The Lifeline That Retail Needs

Customer retention increasingly relies on data analysis, personalisation and third-party integration, which means that data privacy and protection are important. Open Banking is an attempt to encourage innovation through collaboration while allowing customers control over their data.

Mode | Open Banking: The Lifeline That Retail Needs

Written by Pippa Horn.

Customer retention increasingly relies on data analysis, personalisation and third-party integration, which means that data privacy and protection have become more relevant than ever. Open Banking is an attempt to encourage innovation through collaboration all while allowing customers control over their data in a secure way. Although the Open Banking initiative is regularly discussed in the financial services industry, it has gone largely unnoticed in retail and other sectors.

Open Banking is a directive that offers the potential to revolutionise the ways retailers and businesses interact with customers. As such, it could be a solution to many of the problems merchants currently face - a topic we covered in our recent webinar on why retailers should truly embrace the digital age.

What is Open Banking?

Essentially, Open Banking is an initiative that requires financial institutions to make their customers’ financial data “shareable” to licensed third party companies through a particular type of technology called APIs (Application Programming Interface). It is part of a wave of regulations spreading through the EU, in a bid to make financial data sharing easier and more secure. The goal is to protect customers, foster innovation and increase competition amongst financial providers.

The initiative came fully into force in January 2018, and since then UK banks have been busy restructuring their technology stacks in order to allow secure financial data sharing. This financial data includes spending habits, bank statements, recurring bills and so forth. Third party companies such as budgeting apps, pricing comparison providers, payment services and other financial companies now have the opportunity to access customers’ banking information and provide their own personalised services.

However, according to a report by the CCgroup, only half of retailers (48%) are aware of Open Banking, and only one third are planning on taking action. Open Banking could be the regulation that takes the retail industry to another level of digital transformation and customer-centricity, yet it seems that retailers are slow to react to this innovation. We wanted to show a few examples of pain points merchants currently face that could be resolved with Open Banking.

Issues that businesses currently face

Too many intermediaries

The retail industry is notorious for its fragmented market. As a constantly evolving supply chain, retailers need to work with payment providers, suppliers, wholesalers, resellers, logistics companies, merchant services and many more parties. Not only do businesses need to operate the entire back-end of the supply chain, but they have to manage the branding, customer experience and acquisition processes too. In addition to the moving parts involved in the supply chain, every integration and provider will have its own platform, payment method and invoice requirements. This creates an environment with several different departments that are siloed and don’t communicate with each other, which further complicates management.

Open Banking has the possibility of combining many of these moving pieces. By integrating directly with customers’ financial data, a retailer won’t need to use payment providers or merchant services; they can simply pull the money (with user consent) directly from bank accounts. They can skip the debit cards and card terminals, and speak directly to the customer. Not only does this mean a more frictionless checkout experience for consumers, but it drastically reduces processing costs for businesses themselves.

It also means businesses can leverage their closer relationship with consumers to better understand what they really want. They can combine those insights with their payment information to provide targeted offers to their customers so that the users can have an integrated, frictionless payment and loyalty experience, which is the only solution fit for the era of digital commerce we live in today. Rather than being disintermediated by card companies and banks, businesses will be able to nurture deeper relationships with their customers that go beyond simple transactions. By accessing richer customer insights, businesses will be able to make highly personalised rewards to drive loyalty and attract higher value customers.

Low customer engagement

The retail industry is increasingly struggling to maintain healthy customer engagement as consumers and shopping habits are continuing to shift online, and as cashless and contactless payments become mainstream. Many retailers cling onto the high street and are not taking advantage of social media, e-commerce and the opportunities that come with digital. As the younger generations become more accustomed to the likes of TikTok, Amazon and Netflix, anything that is not customer-centric is quickly left behind.

Open Banking offers merchants the opportunity to embrace digital transformation and actually have a shot at competing with big tech companies. By integrating with customers’ financial data, retailers can learn a lot about customers’ spending habits and offer much more personalised services. For example, with Open Banking businesses could easily and efficiently offer highly personalised rewards based on previous purchases at any online and offline shop, which is a cheap and effective way to increase customer engagement and boost sales.

Lack of security

Currently, many retailers and companies are storing their customers’ banking details on file and some are still having to take card payments over the phone. Many continue to use screen-scraping (a process whereby third party companies access your financial transaction data by logging into digital portals on your behalf), and aren’t encrypting their customers’ data or giving them the option to opt-out. As consumers become more aware of the importance of data privacy and security, businesses and retailers will need to take security concerns far more seriously.

Security is at the forefront of the Open Banking initiative. In order to access their customers’ financial data, businesses will first need to go through a licensed third-party provider (TPP) that is regulated by the FCA and meets their stringent requirements. Customer details are not stored with the TPP nor the retailer since everything is integrated using APIs. This means that contrary to popular belief, users actually have complete control over their data and can easily choose who does and doesn’t have access.

A likely future for retail

Not only does Open Banking help to solve current business issues, but it also opens up an opportunity to redefine customer relationships. The reality is that creating an Amazon style one-click button for the entire retail industry is not outside the realms of possibility.

By gaining access to the type of customer data that Open Banking allows, retailers could play a better role in helping consumers purchase the items they want. In fact, they could even implement more advanced technologies that would help predict what users need before they’re even aware (think [IoT] devices)?

PSD2 and Open Banking are regulations that cannot be ignored or avoided. Banks are making customers’ financial data more accessible, and businesses can choose to either embrace it or ignore it. The world is moving online, and Open Banking offers merchants a chance to reinvent themselves and gain a competitive advantage. The new directive will play a large role in the years to come, and we aim to provide the products and services for businesses to be at the forefront of this new wave of payments.

Thanks to Open Banking, a whole host of new products and services are opening up to businesses. The key is finding the best ways to implement the initiative, and using it in a way that truly benefits retailers and customers - and that’s what we’re aiming to do at Mode. Our goal is to build an ecosystem powered by Open Banking where customers and businesses can connect in unprecedented ways through payments and rewards.

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