Open Banking: The Pros and Cons for Retailers

Financial information about customers has typically been stored by banks in their own closed systems. With open banking, however, banks and third-party service providers can exchange financial data through application programming interfaces (APIs). Open banking gives consumers the power to control what information can and cannot be shared with apps and third parties.

Despite having stronger roots abroad, open banking is now beginning to gain traction in the U.S. This past October, the Personal Financial Data Rights Rule was issued by the Consumer Financial Protection Bureau (CFPB). The proposed rule would “require depository and nondepository entities to make available to consumers and authorized third parties certain data relating to consumers’ transactions and accounts; establish obligations for third parties accessing a consumer’s data, including important privacy protections for that data; provide basic standards for data access; and promote fair, open and inclusive industry standards.“

This would expedite the shift to open banking nationally, giving consumers more control over the information about their financial lives and stronger protections against companies misusing their data. It would also encourage competition by forbidding financial institutions from holding onto an individual's data and requiring companies to share it with other organizations that provide better products at the individual's request. The proposed rule would allow customers to break their ties with businesses that provide poor service and prohibit data recipients from mismanaging or fraudulently monetizing private customer information.

For financial technology providers and institutions, this opens the door to innovate the products and services they offer around open banking to drive additional business. At the same time, it also could open up opportunities — and potential challenges — to retailers.

With open banking, retailers may benefit from the opportunity to analyze customers‘ transaction data to offer loyalty programs or personalized promotions that are relevant to their specific spending patterns.

Another potential opportunity is that bank transfers from consumers from open banking may be less expensive than credit card payments. Retailers may be able to add a bank transfer option as part of their payment alternatives for e-commerce and reduce the need for transaction fees. This type of payment method also provides direct availability of the payment amount vs. later payout by the acquirer.

However, open banking could also present some obstacles for retailers. They may feel more comfortable offering tried-and-true payment methods like credit cards that already have established and effective processes in place for authorizing payments, providing payment guarantees and facilitating settlements. To benefit from bank transfer advantages with open banking, retailers may need to set up well-planned background procedures. On the consumers’ side, with open banking they would of course miss out on the benefits of “points” and programs that come from the card schemes and issuers, along with the protections provided.

A lot remains to be seen, but open banking is coming. Retailers need to be prepared and weigh the pros and cons for both their business and their customers.

Jed Danbury is vice president at Computop, a global payment service provider. He has been working in the banking and merchant processing industry for more than 15 years.