Open Banking is Great, But are Banks Maximising the Potential of Card Linking?

Open Banking is Great, But are Banks Maximising the Potential of Card Linking?

Open banking has been a major enabler for the fintech world. By opening what was traditionally a closed ecosystem to third parties, fintech players can now access a world of opportunities to add value for banking customers.

In Europe, the predominant legislation surrounding open banking is the PSD2[1]. Although it has been heralded as a model for other countries to follow, there is one party that appears to be receiving the shorter end of the stick – the incumbent banks. As KPMG notes[2]:

“In the EU, the balance seems to be in favour of the non-traditional players: with the proper consents, banks are required to open up their customer data to retailers, for example, but banks are not able to access retailer’s customer data. This not only creates an imbalance of information, it also dampens the desire for innovation in the banking sector.”

This is especially the case when it comes to one major application of open banking – account linking. Consider the case of fintech unicorn Revolut, which recently raised funds at an eye-popping US$5.5 billion valuation[3]. Earlier this year, the company added bank account aggregation features that will give their users a complete view of their balances and transactions from all their banks[4]. While consumers will no doubt benefit, Revolut will reap more benefits from this than the incumbent banks.

Many incumbent banks are thus busy looking over their shoulder at the looming “threat” of open banking. Others are looking for opportunities to capitalise on this trend that is slowly but surely going global. However, most are ignoring the gold already buried in their own backyards.

Card linking as a means of leveraging granular transactional data

The most common form of card linking is when customers connect their usual debit or credit card to merchants’ loyalty programmes. Compared to filling out forms at the counter, card linking offers a superior user experience – customers need only scan their card number to sign up. Besides the smooth onboarding process, merchants enjoy card-linked loyalty programmes because:

  • They can access their customer’s granular transactional data – such as amount, date, and store location – in real time
  • They never have to handle customer data, meaning they need not be PCI compliant
  • Customers’ transaction data will be automatically captured once they opt-in and until they opt-out

By contrast, account linking’s user experience is much less streamlined. Customers must hand over their account number and sort code – which many are uncomfortable doing – and reauthenticate their account every 90 days. Further, the data is generally much less granular as it pulls from the settlement stream (instead of the real-time authentication stream as with card linking).

In other words, at present, card linking – at least from the merchant’s perspective – simply offers more convenience, both for them and their customers.

But what about the banks? For them, card-linked loyalty programmes offer a means of compensating for the continued squeeze on interchange fees and interest margins (such as the 20% interest rate cap on unsecured loans introduced in Finland in September 2019[1]) by monetising the transactional data generated by these programmes.

However, currently, and especially in Finland, banks are not making full use of this data. This puts them at risk of being squeezed ever tighter as fintechs and challenger banks continually encroach on their territory. We’ve done a lot to improve the data at OP, being the first one of the gates offering multi-bank support, but I think there is still a lot we can do.

Why aren’t banks fully leveraging this data?  Just like with mobile payments, the industry is seemingly waiting for emerging standards that are not eating their lunch. To be honest, we may not be able to envision a business model that can generate a true “win-win” scenario for all parties.

This being said, there is one interesting implementation of card linking that could fit the bill (and help save the environment at the same time) – digital receipts.

Digital receipts – the benefits of getting even more granular

Although the transactional data banks can obtain through card-linked loyalty programmes are more granular than that from account linking, there is still room for improvement. The missing piece here is SKU-level data – not just where, when, and how much in aggregate – but a breakdown that lists each item the customer bought in a store.

This “next-level granularity” can be helpful for both banks and consumers. From the consumers’ perspective, this is something that they would likely readily accept and enjoy. For instance, a 2018 Oracle survey found that 69% of consumers want to have their entire financial lifecycle on digital channels, presuming they can get this alongside a seamless customer experience[2]. Digital receipts would allow them to drill down into their own spending data – a powerful feature from a personal financial management standpoint.

And from the banks’ view, this could lead to increased usage of their mobile banking apps, a crucial advantage in today’s competitive digital landscape. Research by McKinsey discovered that leading banks had an average of 54% of their customers active on mobile, while for slower adopters it was only 24%. This higher mobile usage enabled these top performers to generate 35% of their digital sales via mobile, compared to 25% for the slow adopters[1].

On top of that, greater mobile engagement gave these “digital leaders” another edge – higher digital cross-sales. McKinsey also found that digital leaders managed to grow their digital cross-sell rates – defined as digital sales divided by digital users – by 320% more than the slow adopters. And the digital receipt business model paves way for significant cross-sell opportunities such as:

  • Point-of-sale financing via in-store credit
  • Insurance products customised for a customer’s specific purchases
  • Business banking products personalised to individual merchants based on their customers’ transaction histories

All these are crucial for helping banks combat the trend of “product unbundling” – which fragments customer relationships and is particularly detrimental for incumbents.

Toward a cleaner and more contextual future

The future of banking is contextual. Banks must follow the customer, and not just the industry if they want to maintain and grow market share. That means that we pay attention to  what our customers want.

Digital receipts are an interesting way for banks to leverage their extensive payment card networks (the proverbial gold in their backyards) to gather the valuable ground-level data they previously lacked access to. In other words, digital receipts can serve as a “contextual data repository” to help drive highly personalised engagement.

And of course, we all believe in fintech for good. That includes not just empowering people, but also helping tackle the existential issue of the environmental sustainability as well. In the EU, we are fortunate to have progressive regulations, which recently banned the use of harmful BPAs in paper receipts[2].

This is a good start, but we can all do better. I see absolutely no reason why, in the near future, receipts should be anything but digital.

[1] https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en[2] https://home.kpmg/xx/en/home/insights/2019/05/open-banking-for-greater-customer-value-fs.html

[3] https://techcrunch.com/2020/07/24/revolut-extends-series-d-round-to-580-million-with-80-million-in-new-funding/

[4] https://techcrunch.com/2020/02/10/revolut-truelayer/

[5] https://www.kkv.fi/en/current-issues/newsletters/the-consumer-ombudsmans-newsletters/2020/1-2020-making-every-effort-to-reduce-the-cost-of-instant-credit/

[6] https://www.oracle.com/a/ocom/docs/dc/new-digital-demand.pdf

[7] https://www.mckinsey.com/industries/financial-services/our-insights/breaking-away-from-the-pack-in-the-next-normal-of-retail-banking-distribution

[8] https://www.pulpapernews.com/20200204/11150/paper-receipts-remain-essential-choice-shoppers-following-eu-bpa-ban

About Kristian:

Kristian runs innovation operations at OP – Finland’s biggest Financial Group. Kristian has created services for millions of customers, including the award-winning Pivo Mobile Wallet. He is an expert in lean service creation and is public speaker about startup innovation and impact of technology to businesses.

Kristian Luoma

Kristian Luoma

Head of OP Lab - OP Financial Group