Open Banking has changed the eCommerce landscape, and now looks set to reshape the travel industry

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By Harry White, Senior Business Development Manager at ECOMMPAY

Open Banking is officially described as a "secure way for the UK's businesses and consumers to move, manage and make more of their money". The practice has been in place since 2018 and has grown considerably in popularity, offering plenty of benefits for businesses and consumers alike.

In this article, we'll give a brief overview of how Open Banking works, and the advantages and disadvantages to eCommerce merchants, before focusing on how the travel industry can benefit from Open Banking as a payment method.

What is Open Banking?

First and foremost, Open Banking is less a technology and more a directive or arrangement within the banking industry. The term describes how in 2018, the major banks agreed to share customer financial information with third parties, opening up access via shared application programming interfaces (APIs). In straightforward terms, APIs allow software and apps to communicate with one another and share data.

Consumer information sharing is 100% consent-based, but even so, Open Banking allows fintech providers and other companies to build innovative services that benefit both merchants and consumers alike.

What are some of the uses of Open Banking?

Open Banking has plenty of potential use cases, and many haven't yet been explored to their full potential. From a purely information-based point of view, Open Banking allows companies to build apps that analyse banking data to help consumers manage their finances or access credit ratings and other important information, with payment solutions already existing that offer access to hundreds of banks across the EU and UK via a single integration.

How is this relevant for eCommerce applications?

Open Banking is commonly known as pay-by-bank or account-to-account payment when used in an eCommerce setting. The same API-based technology mentioned above allows customers to pay directly from their bank account and authorise transactions from within their existing banking apps in real-time.

Here are some of the advantages of this payment method:

  • Authentication happens with the user's bank, so merchants don't handle any sensitive information at checkout or have to worry about fraud liability during this stage of payment. 
  • Open Banking transfers are instant in the UK and EU.
  • Costs are generally lower than traditional banking, without expensive or complex fee structures.
  • Open Banking is proving to be a high-converting payment method, as shoppers can initiate and authorise payments quickly and without friction, using fingerprint or Face-ID sensors to approve transactions.
  • Chargebacks are effectively reduced to zero. 
  • eCommerce businesses are able to expand into new markets and scale faster, as Open Banking allows a single integration to cover multiple payment methods and thousands of banks across Europe and the UK.

Are there any disadvantages to Open Banking?

If Open Banking has a single main disadvantage, it's probably that the technology is still relatively new. When payment provider ECOMMPAY (in collaboration with Censuswide) conducted two surveys of UK business leaders in 2021, 41% of respondents admitted that they lacked knowledge of the benefits and applications of Open Banking technology.

As Open Banking continues to gain traction, it will become necessary for businesses to improve their knowledge of this technology and take extra care to choose a reputable provider that adheres to data protection regulations.

In January 2022, over 3.86 million transactions were made using Open Banking. By February of the same year, the number of active users had reached 5 million, so there's no doubt that the technology has already taken hold amongst UK consumers.

Integration challenges

Some businesses have found the integration and implementation of Open Banking to be overly complex. This problem is partly due to the lack of a unified API standard across all banks. This can easily be solved by partnering with a payment provider that has already aggregated multiple Open Banking services into a single integration, and who will take responsibility for ensuring everything runs smoothly. 

As for integrating Open Banking into booking engines and CRMs, this could remain an issue for legacy systems. However, as the providers of these systems learn that Open Banking is the future, they will begin to adapt and perhaps even alter any commercial agreements accordingly.

Addressing consumer protection concerns 

Unlike a credit card transaction where a chargeback can be initiated to recover funds, Open Banking confers little consumer protection in the event a company goes out of business. With questions still remaining surrounding consumer payment safety, there may be less desire from consumers to use Open Banking as a payment method.

The industry is currently trying to uncover how users can be better protected while using Open Banking to make payments, and the upcoming PSD3 framework will cover issues that PSD2 misses. For Open Banking providers, it is a "must" to set up an agreement that merchants will be ready to take adequate action when disputes arise, until such time that future regulation forces them to do so.

Open Banking for travel and hospitality applications

Until recently, paying for a trip or booking accommodation would realistically require a credit or debit card. Today, however, a combination of improved technology and shifting demographics means that travellers are increasingly looking to more modern smartphone-based alternatives, including Apple Pay, Google Pay, and Open Banking.

Although a change in payment preferences is well underway, according to ECOMMPAY's survey data (in collaboration with Censuswide), 22% of UK consumers think that the travel industry could offer improved payment services. Regarding hotel bookings, 17% of travellers believe there is potential for improved payment processes.

So how can Open Banking help the industry to provide better payment experiences as it recovers from a devastating loss of earnings during the COVID-19 pandemic?

Many of the advantages of Open Banking listed above are relevant to any industry. However, there are several examples of where the technology could be utilised specifically to improve bookings for trips or accommodation.

  • Pay by Link: Although not a payment method as such, payment links act as one-time digital invoices containing booking data and payment details. Links can be sent by email, messenger, or other methods, and upon receipt, customers can pay while enjoying the seamless experience provided by Open Banking. Payment links allow the cost of a travel booking to be easily split between a group of people, whilst Open Banking also helps to reduce chargebacks to zero.
  • Buy Now, Pay Later: Effectively a point-of-sale loan, BNPL plans allow customers to pay in several smaller interest-free instalments, with Open Banking facilitating fast analysis of a customer’s financial data to circumvent lengthy credit checks. 46% of travel and aviation industry survey participants thought that their customers needed more options and flexibility with BNPL models, so it's no surprise to see a rise in interest for this payment method in the travel sector — though, of course, providers are responsible for informing and educating clients about the financial risks of BNPL schemes.

In conclusion

Open Banking has the potential to revolutionise the travel landscape in Europe and the UK. Although Open Banking transactions have risen rapidly, the technology is still in its infancy and promises plenty of exciting applications in the tourism and hospitality industries.