Recessions, downturns, slumps, volatility. Call them what you will, but they are an unavoidable part of the business cycle. History shows that those companies which are prepared for a recession tend to be more stable through it, and accelerate out. And since the question of the next recession is not “if”, but “when”, there is always a strong business case to be made to start preparation to mitigate the worst effects.
Controlling costs, investing in innovation, and retaining customers are a few common themes for navigating a recession effectively. In this post, we are going to discuss how open banking can help with all of these.
Open banking and pay by bank
First, it may be helpful to briefly define two key terms. Open banking is the concept that banking data is much more useful to a consumer if it is securely accessible to permissioned third parties, which, among other things, can enable an account holder to make payments to merchants from their bank account. And pay by bank is the payment method enabled by open banking. You can see how this payment method works from a consumer perspective here.
Control costs, and protect or grow margins
Every time your business accepts a card payment online, you pay between 2.87-4.35% of the transaction in fees — an unnecessary toll that drives up the cost of doing business, and which, at scale, is incredibly expensive.
This is where pay by bank is a very interesting alternative. Pay by bank transaction fees are 70-80% lower than those of credit cards. This significantly lowers the cost of doing business for the merchant, particularly at scale. And these lower fees give you two attractive options; you can pass on these savings to your customers, or you can keep prices the same and increase your margins.
For subscription merchants, up to 48% of customer churn comes from failed payments. This is due to a range of risks cards carry when it comes to these types of payments, including cards expiring, or being stolen, or lost. Left unchecked, this involuntary churn undermines subscription business models, as the cost of acquiring new customers tends to be much higher than retaining existing ones.
But with pay by bank, there is no chance of a transaction failing due to these reasons, since bank accounts can’t be lost or stolen, and don't expire. And while there is still a risk of insufficient funds, pay by bank providers such as Link Money are able to predict with a high degree of accuracy if there will be sufficient funds in the account.
2022 research across 4,000+ US adults, found that two of the key reasons consumers abandoned their purchase at the checkout were a) not trusting a website with their credit card information (18%), and b) long/overcomplicated checkout processes (17%).
With pay by bank, no login information is shared with the e-commerce site — the customer is redirected to their own bank environment where they authenticate the payment, reducing their concern about sharing credit card information on the merchant’s site. This also reduces the complexity of the checkout process, particularly if the customer’s payment can be quickly and seamlessly authenticated with biometrics or PIN. Combined with lower swipe fees, increased conversion at the checkout can deliver sustainable and significant boosts to revenue.
Payment fraud comes in a variety of forms. When it comes to card payments, some of the most common forms of fraud include:
Card details being stolen even if the criminal doesn't have the card in hand, for example, through skimming (when card data is electronically copied via an illegal device on an ATM, point-of-sale terminal, or similar), BIN attacks, or identity theft.
Cards being stolen physically and used to make quick purchases before the cardholder realizes it is missing.
Furthermore, chargeback fraud — when a consumer makes a purchase and then requests a chargeback despite receiving the purchased goods or services, can also be an expensive cost to doing business.
As mentioned above, bank accounts can’t be stolen or skimmed. And furthermore, many bank accounts require stronger authentication than cards, which drastically reduces the risk of the first two types of fraud above.
Now let’s look at chargeback fraud. Pay by bank does not enable chargebacks. This is due to the nature of the transaction itself. Merchants are accountable for certain returns, but to mitigate fraud claims, Nacha requires Banks to collect a completed and signed form from their customers for unauthorized transactions. Additionally, Nacha recommends banks add the following verbiage to these forms “Any intentional attempt to obtain money from a financial institution by misrepresenting whether a transaction was authorized may result in the imposition of fines up to $1,000,000, or imprisonment up to 30 years, or both under the provisions of Federal law (18 U.S.C. §1344).” Therefore pay by bank can significantly and sustainably reduce the costs of fraud for any business that sells online.
Managing recessions is an offensive game — and the prize is huge
Companies that are not prepared for recessions often react defensively when they hit, and implement short-term, short-sighted cost-cutting. So once the tide inevitably turns, they have fewer resources to power growth into recovery. As a result, many of them never truly recover.
The message here is clear. Whether there is a recession coming tomorrow or in five years, investing now in innovative ways to lower costs, retain customers, and protect margins, will give you a much higher chance of weathering volatility and accelerating into the recovery.
To find out more about pay by bank, contact us.