What is open banking and will it replace card payments in the future?

 

Our financial information and how we protect it remains at the forefront of every households agenda.

In 2018, open banking came into force providing a series of modifications to how banks work with your financial data. As long as you give your permission, UK regulated banks can share your financial data including statements and spending habits, with providers.

These new changes help customers and businesses gain access to better deals and manage their money more effectively. So what are the key benefits?

  • Online or mobile banking enables customers to use websites and apps to share their information in a regulated way in order to make their money work better for them with new deals and services, yielding better results when it comes to price comparison sites.
  • Clarity of financial data is key when it comes to reviewing finances and open banking provides a view of this all in one place.
  • Being able to make payments directly from their bank through direct debit and instant payments provides customers with ease and flexibility.

So what does this mean for the future of credit and debit card payments?

If we look at the current status-quo, cards and direct debits can sit together in unison. In the case of a gym membership for instance, an initial payment is usually made by card with subsequent monthly payments collected via direct debit.

Alternatively some organisations choose to avoid direct debit collection altogether in favour of recurring card payments, due to the flexibility inherent within the card payment process, but at a significantly higher transactional cost.

Underpinning the decision as to which suits the process for an individual customers is the demographic and cost, as well as how long it takes to complete the process. Direct debit for instance, currently sits upon the Bacs 3-day cycle, with long (typically 10 days) notification periods before collection is possible (under scheme rules).

Open banking will introduce a number of new initiatives, one of which will complement the existing direct debit process. Request to Pay (RtP) could potentially diminish the reliance on card payments through its ability to collect payments in real-time as well as the fact it is based a messaging stream and feedback loop, which would potentially streamline the collection process.

It is therefore unlikely that open banking will replace card payments anytime soon (if at all). However given the potentially favourable transactional fees levied by the banks, compared to card fees, it will certainly take a big chunk of existing and new card business going forward.  With open banking set to save the UK economy as much as £3 billion per year, it could be something that evolves over time.

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