Open banking: what small businesses need to know


Few would argue that the pandemic has had a major impact on business. For many, the pandemic was a disaster. But for others, it ushered in a season of positive change. And for those who survived and thrived despite his wiles, it was all about agility and innovation.

One of the biggest themes to emerge from the ashes of the pandemic has been that of digital transformation. Almost overnight, it seemed that companies of all sizes were deploying technology-driven initiatives and other measures to keep commerce going. And while things like remote work and the “great layoff” made the lion’s share of headlines, there was an equally important concept building steam within the banking and payments industry. For those who followed FinTech, it was all about a disruptive concept known as open banking.

What is Open Banking?

While some trace the origins of open banking back to the 1980s and Deutsche Bundespost, its current form only emerged in January 2018 when the European Union passed its second Payment Services Directive (PSD2) into effect. McKinsey & Company explains that PSD2 is part of a global trend in banking regulation that emphasizes security, innovation and market competition. The company noted that “PSD2 is an important step towards democratizing the banking sector.”

For small and medium-sized companies, the emergence of open banking is very good news.

“With a customer’s consent, open banking allows banks to share data with third parties, making a consumer’s data and money more flexible and transparent,” said Anastasija Tenca, Chief Operating Officer at Noda Pay. “For far too long, banks and payment companies had a stranglehold on how companies could process financial transactions. With open banking, the door has been kicked wide open and companies and their customers benefit from this.”

Noda Pay is an open bank payment platform that allows businesses to bypass expensive bank intermediaries, saving both time and money on their transactions. Noda Pay is available in the UK and EU and also has plans to expand to North America and Singapore. Other notable players in the open banking world include Tink and Railsbank.

Open banking is more efficient

For decades, the process by which companies exchanged payments for goods and services was closed and inefficient. All data and actions related to a person’s bank or credit account were available only to the owner of the account and their bank. Open banking has changed things by introducing the concept of ‘banking consent’, which means that an account holder allows a third-party provider (TPP) to access and connect to their banking details such as account information, balances, transactions, etc. There is also a payment initiation option, which allows TPPs to create new payment methods without intermediaries, such as card schemes (Visa, Mastercard) and wallets (PayPal, AliPay).

“Not only does open banking bring efficiency and cost savings, it also reduces certain liabilities,” added Tenca. “For example, it can benefit merchants by eliminating chargebacks and the risk of default. Sellers can expect real-time payments and real-time confirmation, which improves conversions and benefits consumers. Ideally, open banking creates more competition, leading to better products and more customized consumer services.”

As with other mature, highly regulated industries, there are many roadblocks that have prevented the banking sector from being as innovative and efficient as other sectors. And that legacy baggage has created a major divide between banking services and other technology-enabled industries. But this gap can be closed by innovative TPPs licensed to connect to banks via open banking protocols. Banking in the future will be less about who owns the bank customer and more about which companies can use data most efficiently.

“Think of the open banking framework as the App Store concept for the financial world,” says Tenca. “Instead of a few big technical service providers, there will be many, connected to banks and competing with each other. For businesses, the savings will be incredible.”

How Open Banking Can Help Your Business

Businesses can get a lot of value from open banking-driven payments. Compared to collecting payments via cards or wallets, open banking allows businesses to:

Save money on commissions: Traditional payment processing costs businesses more than 3% of the payment. Open banking eliminates intermediaries in the processing of bank payments, allowing companies to save up to 2% per transaction. Improve Acceptance Rates: With open banking, payment acceptance rates are as high as 98%. The average acceptance rate for credit cards is 70% and for online wallets it is 80%. Shorten time-to-market for startups and small businesses: There are fewer tech hoops and less paperwork to get an open banking merchant account up and running. Businesses can begin collecting payments on most platforms within hours of service commencement. Eliminate cash shortfalls: Within the open banking workflow, money arrives in merchant bank accounts in seconds. A better dispute resolution process: Instead of businesses paying chargeback fees, right or wrong, open banking has a more balanced dispute management protocol.

What’s next for Open Banking?

The main obstacle to the wider adoption of open banking is the reluctance of banks to share technical accesses. Many regions, including the UK, Europe, Canada and Australia, have already introduced regulations requiring banks to support open banking. From 2021, many open banking providers started to achieve significant results in Europe and the UK. But other regions have lagged behind these pioneers. However, there is no doubt that open banking will continue to spread in the coming years and radically change the banking and payments industry for more companies around the world.

Image: Depositphotos

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