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How Open Banking Presents Much-Needed Cost Savings for U.S. Businesses

When it comes to costs, the processing fees from credit card swipes have long been a major thorn in the collective sides of retailers, generating revenue losses often second only to labor

Meghan Keivel Cruz, Sr. Director, Grassroots in a 2022 article for NRF, has harsh words for the situation: “The U.S. credit card market is broken and unfair… [businesses accepting cards are] forced to pay an exorbitant, non-negotiable “swipe” fee…These fees are not set in a competitive or transparent manner.”

These fees add up to billions in costs, as credit card transactions account “for 37% of consumer purchases by dollar value in 2021,” according to a report by McKinsey.

Indeed, it’s a larger problem that the industry has long been aware of, but not readily able to deal with in the U.S. due to long-standing regulatory hurdles preventing smooth integration with major bank APIs to facilitate frictionless ACH payments. 

When coupled with the vested interests of powerful Wall Street actors—who profit tremendously off of these fees—retailers have long been essentially coerced into paying by a powerful, $2.1 trillion dollar payments industry.

Credit Cards Stranglehold on U.S. Retailers Fuels Already Severe Inflation and Hurts Business

Writes Leon Buck, VP of Government Relations, Banking and Financial Services in a 2022 NRF piece, “congressional concern is mounting” about ever-increasing fees associated with credit card swipes: 

“The fees, which are most merchants’ highest cost after labor and drive up the prices consumers pay, soared 24 percent last year to an all-time record of $137.8 billion.”

Continues Buck, the problem has become severe enough that the congressional intervention has commenced as inflation has hammered the nation:

“Swipe fees have more than doubled over the past decade, and cost the average American family more than an estimated $900 a year…swipe fees automatically go up when prices increase. In doing so, they act as a multiplier that drives inflation even higher.”

The conflict eventually culminated in the Credit Card Competition Act of 2022 introduced in July of 2022 and currently in review by the Committee on Banking, Housing, and Urban Affairs. The bill is supported by the NRF.

Meanwhile, retailers face down a myriad of cost factors on top of their processing fees: building socioeconomic pressures such as rushing, historic inflation (near 10% YoY in multiple countries), labor shortages, an increased rate of ecological disasters, and the threat of an official recession all weigh heavily on retailers minds…and margins. 

In response, finding ways to leverage tech to affect efficiency gains has been the most consistent theme, whether (e.g.) AI/ML-powered technologies, leveraging geospatial data analysis, increasingly integrated cloud-based computing, or mobile-powered in-store IoT investments.

While all good ideas, many of these infer significant startup/service costs, and in some cases, the potential benefits aren’t always as clear as a decision leader might like them to be when looking at the price tags.

Yet, what if there was a way to directly cut some of retailers’ largest costs without further withering their workforce or compromising other areas of the business? 

What if U.S. retailers could, at last, integrate true Open Banking Payments that allowed their customers the ability to safely and securely process transactions directly through their bank using nothing more than a login?

A Way Out? How Some Companies are Making Open Banking a Reality in the U.S.

In contrast to well-established open banking practices in the EU, what access to ACH-based payments there has been in the U.S. has been (until very recently) plagued by poor usability, general clunkiness, and security concerns.

However, much of that is set to change with the introduction of new Open Banking services that make smooth, easy, and fast direct bank payments a reality for U.S. customers long deprived of what their EU counterparts have so enjoyed. 

“Operating cost pressures and fees, particularly around increasing card presence, are what is really driving this need for companies to seek alternative forms of payment outside of cards,” noted Rick Castello, Head of Digital Commerce with Trustly.

Trustly, a global fintech company founded in Sweden in 2008 and with a strong presence in North America due to its merger with California-based PayWithMyBank in 2019, utilizes an Open Banking payment method that allows customers to shop and pay from their online bank account without the use of a card or app. 

Further distinguishing itself from its peers (and of particular import to making Open Banking a reality in the U.S.) Trustly has secured full API integration covering over 99% of U.S. bank accounts. 

That means faster, smoother transactions without the aforementioned need for identifying bank data such as debit and account numbers, circumventing even the need for a card swipe or app. These API-integrated transactions would not only be about as secure as a payment transaction can be, but guaranteed against fraud. 

Continued Castello, “what that API integration allows us to do is completely modernize how ACH transactions are processed for both merchants and customers.”

This comes at a much-needed time as interest rates are set to increase, noted Castello: “The average credit card interest rate for customers today went from 16.3% in January to 18.7% today. We are expecting to blow past the all-time high of 19% in the near future.

“Customers don’t want to keep accumulating debt at these high-interest rates.”

Open Banking Payments, therefore, present a win-win scenario for retailers and customers alike, cutting transaction fees (a huge, cut-and-dry cost reduction for businesses) while reducing customer’s need to rely on increasingly interest-heavy credit card debt that quickly becomes a trap many borrowers can’t escape

That debt presents a major limiting factor for future consumer spending among cash-strapped Americans was recently reflected in quarterly reports from large retailers such as Target and Walmart

Furthermore, it presents particular advantages to many younger consumers, a highly sought-after yet-at-times-elusive demographic that is often a key part of retailers’ omnichannel marketing plans and future earnings outlook. 

Due to depressed wages, student debt, and other building socioeconomic factors, younger buyers are often distrustful of credit cards, relying instead on debit card transactions; headlines a recent NYT piece, ‘How Millennials Became Spooked by Credit Cards.’

However, using one’s banking information—even via a debit card—presents significant risks to one’s account safety. Argued Castello, “If a debit card gets compromised, it’s scary because that’s your real money and it isn’t generally guaranteed.”

What API-integrated Open Banking ensures, however, would be not only secure transactions but those aforementioned guarantees in the event of fraud. 

This is possible because the APIs combined with security features such as split tokens and two-factor authentication allow providers such as Trustly a level of guarantee that makes total fraud protection a reality.  

In brief, smooth Open Banking transactions have been long overdue in the U.S., and today, social and economic conditions make their adoption more urgent than anytime before. 

Fraud of all kinds is on the rise, and people can afford it less than at any time before with record-setting inflation combined with a decrease in real wages of 2.8% at a time when they should be rising.

By integrating Open Banking, businesses stand to not only save themselves heaps of money but meet their customers’ needs at a time when they need to do both urgently.