How Open Banking Will Quietly Edge Out Credit Cards
If you went grocery shopping any time in the 1980s or 90s, you remember a phenomenon that no Gen Zer will — the moment at the end of the checkout line when everyone dug out their wallet or purse, extracted their checkbook and wrote a check.
Check usage peaked in the 1990s. According to research from the Federal Reserve, they accounted for about 60% of payments made in the U.S. at the turn of the 21st century. As of 2019, they only accounted for 5%. But it didn’t happen all at once. It was a gradual shift, a dwindling over time.
In a 2014 article in The Atlantic, "The Spectacular Decline of Checks," Matt Phillips writes that the movement away from checks was largely driven by consumer preferences and that "debit cards and credit cards are by far consumers' favorite way to make payments."
That may still be true. But it won't stop credit cards from being moved aside by open banking, because consumer preference won't be the driving force this time. Business preference will be.
Open Banking 101
Open banking is a system in which third-party providers (TPPs) use APIs to integrate with banks and other financial institutions to give people other options for managing money, borrowing money and making payments.
With open banking, customers can give consent for an app or company to look at their financial information, such as bank statements and payment transactions, and use it to simplify a variety of tasks, including verifying their identity to confirm how much money they have or how creditworthy they are.
Companies can also take payments directly from their customers' bank accounts in real time and without the middlemen, saving them considerable cost and churn — particularly if their model relies on recurring payments. While all businesses will benefit from the innovations that are happening in the open banking space, it's the subscription-based and global digital companies that will push their customers to put aside the plastic and embrace open banking.
The Subscription Economy
As of 2019, 69% of Americans — including 88% of Americans ages 22 to 35 — paid for at least one streaming service, according to a report from Deloitte. This is just one of many kinds of subscription-based services that continue to gain market share. The subscription economy and the companies that comprise it will likely be the primary driving force behind the adoption of open banking in the U.S.
To get more specific, there are five types of companies that have a lot to gain from open banking:
1. Streaming services like Spotify, Netflix and Disney+.
2. Non-streaming digital services like VirtualDJ and SoundCloud.
3. Physical subscription services like Blue Apron and Stitch Fix.
4. On-demand services like Uber, UberEats and DoorDash.
5. B2B online software companies like Adobe and DocuSign.
A Forrester report commissioned by my company found that two in three companies in the U.S. see failed payments turn into churn at least 11% of the time, and at least 11% of failed payments turn into bad debt for two out of three B2B companies and one out of three B2C companies. Because these companies rely on recurring payments, they suffer the most churn when credit cards decline or expire. Like all businesses, they also spend a lot of money on interchange, assessment and payment processor fees, which, according to Bankrate, cost merchants an average of 1.5% to 3.5% of every credit card transaction in 2020.
Unlike credit cards, bank accounts don't expire every three to five years, which will significantly reduce this churn. And because open banking enables companies to receive payments directly from customer bank accounts, they will no longer need to pay these significant credit card processing fees.
Global Digital Companies
Global digital companies, which include the B2B online software companies listed above, have a different set of challenges that will drive the adoption of open banking.
For one thing, it's painful to collect payments in different currencies and countries. While Americans are hot on credit cards — and corporate credit cards — this isn't the case in many other countries. According to Statista, some 65% of Americans have credit cards, but only 41% of the French, 20% of Brazilians and 3% of Indians do. Open banking can flex to local payment preferences and cultures because it enables payments directly from bank accounts.
Open banking will also provide global B2B companies with an easier, less expensive way to process big transactions across currencies and a more effective way to mitigate fraud.
While open banking has taken root in the U.K., EU and Australia — spurred by legislators and regulators — it is still early days in the U.S. Open banking isn't regulation-led here, so innovation is lagging and industry players must work directly with banks to enable transactions via their API. U.S. companies looking to expand into Europe and the U.K. may find that open banking is a suitable payment for these markets, with the U.S. to follow later.
But I believe the upshot is the same. As global businesses incentivize customers to pay with more secure, cost-effective methods and as payers increasingly demand frictionless checkouts and single-tap payment experiences, digital-first account-to-account payment methods like those enabled by open banking will become increasingly ubiquitous, as they have across the Atlantic.
First, it will be just a new option on the checkout page, and you’ll choose that option because there will be a benefit to you, such as an incentive. And then, on some future day, you’ll realize that all of your credit cards have expired. And you didn’t even notice. Because, like checks, you simply have no use for them anymore.