Open Banking at the point of sale – 3 factors to consider

by Peter Harmston, Partner, Head of Financial Services Payments Consulting, KPMG in the UK | Simon Albrighton, Partner, Head of Sectors Consulting, KPMG in the UK

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Open Banking is 5 years old and has undoubtedly been a success so far. 6.5 million users, 7.5 million payments in total, and 1 billion API calls per month all demonstrate this is a service that has gone beyond the incubation stage, to one that is nearing decent adoption.

In parallel, we have seen a new ecosystem born and begin to flourish. The major UK banks have all enabled API access and 246 third party providers have registered with the FCA. That’s a lot of companies driving user adoption, refining customer experience, and launching innovative propositions. So far so good.

But what’s next for Open Banking? What is the next big nut it needs to crack? We believe it’s point of sale. The ability to use Open Banking to pay for our groceries instore as easily and securely as we can using our card. It is possible, but there are a number of issues to overcome.

Making the shift from card to Open Banking instore

Card usage is well embedded in our spending habits. In 2021, it is estimated that 17.1 billion transactions were made instore. Of these, 90% were made using card, the majority of which were via debit card. Consumer purchasing habits, the instore experience, and retailer technologies are all centred around card payments. For Open Banking to become a viable alternative, it has to provide a similar or better customer experience and start to replace the status of card as our go to payment type. It’s a hard task but one that is possible, and one that is worthwhile for the sake of both retailer and consumer.

The best current example of Open Banking adoption is HMRC’s spectacular transaction growth. In 12 months, from January 2022, the total value of Open Banking payments HMRC processed increased from £2.5 billion to £10.5 billion. Representing a huge shift in our collective psyche, we wonder if this is the same turning point as when buses and trains started accepting contactless card payments and the market just took off.

HMRC has seen immense benefits too. By August 2022, it was estimated that HMRC had saved over £500,000 in interchange fees. Reconciliation has improved also as the reference field and destination account information is automatically populated, removing the possibility of customer error.

Customers love the ease of use and retailers like the cost savings so how can we make it happen?

3 considerations for utilising Open Banking at the point of sale

These are the three factors to consider:

1. Great customer experience

Customers must be able to use Open Banking easily instore. The ideal would be to use Variable Recurring Payments (VRP) – authorising your bank to initiate payments to a specific third party without authenticating yourself each time.

The customer would set up a mandate for the retailer. They would then either tap their loyalty card at the till, scan a QR code at self-checkout, or scan goods using their mobile and click ‘pay’ to trigger a payment from their account seamlessly.

While VRP builds momentum, a short-term solution would be the customer using their app for shopping instore and checking out without the need to even visit a till, reducing overall waiting times. Driving customer traffic through the app gives the retailer the opportunity to sell further goods by recommending recipes based on the shopping cart and missing ingredients or promoting special offers.

The challenge is convincing the customer to download the app, stick with it as they shop, and not abandon it at the checkout stage. The retailer also needs to ensure they can recognise the online purchase immediately and not have the customer met by a security guard as they set off the alarm at the exit.

2. Reward

Open Banking payments are made via the customer’s bank account. It is effectively a bank transfer from the consumer to the retailer. Therefore, it doesn’t benefit from card rewards or section 75 consumer protection. To boost Open Banking, retailers will need to incentivise consumers with rewards. Significant cost savings on interchange fees gives room to reward consumers and instil protection akin to section 75. Ultimately, there has to be a benefit for the customer. This could start with loyalty points or discounts on goods but could stretch to enhanced features such as integrated receipts, faster refunds, and easier returns.

3. Retailer adoption

Open Banking at the point of sale won’t ever happen unless retailers invest in the technology. At the front-end, apps are needed that can facilitate the shopping experience and checkout stage, or Open Banking via QR codes needs to be integrated in the self-service checkouts.

In the back office, real time updates on instore purchases made via the app are needed, ensuring the payment is received and the goods can be released from the store. In addition, retailers need to ensure payments can be reconciled, errors identified and corrected, and returns processed smoothly.

The Open Banking universe will continue to grow in many ways. Fintechs will continue to bring new propositions to the market. But it is time we broke Open Banking into the mainstream. Making it easy to use and rewarding will drive adoption, bringing benefit to retailers and consumers.

The payments landscape is constantly evolving. Speak to our experts to understand how we can help drive your payments transformation.

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Article by KPMG UK

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