April open banking insights

New Strong Customer Authentication (SCA) rules came into effect resulting in retailers losing millions in sales. Consequently, industry experts discussed how VRPs and open banking could bridge the gap, offering an alternative to traditional card payments. 


VRPs will revolutionise money management 

It’s predicted that the adoption curve for open banking will increase significantly after the July CMA deadline for Variable Recurring Payments (VRPs). With just two months to go, the open banking ecosystem is gearing up for the next wave of innovation. 

Last year, there was a 60% increase in active open banking users. Undoubtedly, open banking-enabled payments played a significant role in reaching adoption milestones. From security to improved customer experience and decreased costs, the technology has many benefits. It offers an attractive alternative to traditional card payments. Card-on-file transactions present an increased risk of fraud or failed payments, which has a knock-on effect on customer retention and customer experience.   

According to AltFi, VRPs will revolutionise the way people manage their money. Additionally, automating the movement of funds will ensure that customers can make the best of their funds, paying off debt or sending additional funds to investment accounts.   

The use cases for VRPs are numerous. For instance, customers might want to create spending parameters for their favourite merchants or set a budget for taxi or food delivery services. This would allow a merchant to collect payments for various amounts within the maximum spend without customers authenticating each transaction.


Strong Customer Authentication adds friction to journeys 

New Strong Customer Authentication (SCA) rules coming into force will impact customer checkouts, adding friction with extra verification steps. 

Previously, one-click checkouts were common for card payments. Some merchants that have implemented SCA reported a drop in conversions. According to Barclaycard, retailers are ‘losing out on £4.3million in sales each day as new SCA rules block non-compliant online transactions.’ 

Embedding open banking into the payment process may offer a solution. The end-user is required to authenticate the transaction within the payment process itself, reducing friction and improving the customer experience. 


The diminishing role of incumbent banks 

Last month, J.P. Morgan Chase’s CEO, Jamie Dimon outlined competitive threats to incumbent banks in his letter to shareholders. Furthermore, he warned that the influence of US banks has fallen in the past decade. The statistics reveal the drastic shift in financial services. 

According to Business Insider, ‘The collective market capitalisation of the US biggest incumbents—defined as those labelled as US Globally Systemically Important Banks (GSIBs)—grew from $800 billion to $1.5 trillion.’ However, this pales in comparison to the combined market capitalisation of four big US tech companies: Apple, Google, Amazon, and Facebook. These companies grew significantly, surging from $500 billion to $6.9 trillion. 

Furthermore, banks’ share of mortgages originated fell from 91% to a mere 32%. In contrast, non-banks’ share grew from 9% to 68%.   

Walmart is another example of a non-bank rolling out financial products. Walmart made headlines when it backed Hazel in January. This is part of the businesses’ strategy to offer a single financial services app.  

Additionally, Apple continues to make headlines for Apple Pay, Apple Card and its BNPL offerings as well as credit risk determinations. According to AltFi, ‘Apple and other big tech firms are joining the likes of Monzo and Starling Bank in setting “new standards” for customer experience in banking.’ 


FCA reviews neobanks’ financial crime assessments   

According to Finextra, some UK challenger banks are not conducting adequate checks on new customers. As a result, their financial crime assessments need improvement. 

Undoubtedly, ‘digital-first’ banks have forever changed the UK banking market. They’ve attracted millions of customers with a frictionless experience and state-of-the-art IT systems. Incumbent banks raced to keep up with their growth. However, security concerns persist.

A rise in the number of Suspicious Activity Reports reveals the inadequacy of checks as some banks fail to apply enhanced due diligence and proper documentation. This formal procedure is applied in higher-risk circumstances, such as ‘managing politically exposed persons.’ 

It’s clear that robust financial crime controls are needed to enhance existing checks on new customers. Nonetheless, the Financial Conduct Authority (FCA) praised challenger banks’ innovation, which has allowed them to verify customers quickly and at scale. 


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