In the dynamic and evolving world of automotive retail, the introduction of Open Banking has generated significant interest and expectation. As pioneers in this space, having processed the industry's first Open Banking payment back in 2021, our journey with some of the UK's largest and most forward-thinking automotive retailers has given us deep insights into the effectiveness and practicality of Open Banking as a payment option. As we approach the two-year mark of Open Banking's introduction into automotive retail, it's an opportune moment for us to reflect critically on its performance, particularly in handling balance payments.
The promise of Open Banking
The attraction of Open Banking in the automotive sector has always been its potential to revolutionise payment processes at various stages. This innovation promised not just a seamless buying experience for customers but also a more cost-effective transaction model for retailers. Unlike traditional card transactions that often come with variable fees based on the transaction amount, Open Banking offered the advantage of a flat fee per transaction. This subtle yet significant distinction can have a profound effect on the retailer's profit margins, especially in an industry where the average Return On Sales is typically less than 2%.
In an ideal scenario, Open Banking delivers a streamlined process where customers can complete payments swiftly and securely through a few clicks on their phone. Simultaneously, the sales team gains the ability to confirm payments instantly without the need to manually check with their accounts department. This efficiency, combined with the substantially lower costs compared to card payments, positioned Open Banking as a seemingly perfect fit for the fast-paced, cost-conscious world of automotive retail.
The Challenge with Open Banking for Balance Payments
Despite its initial promise, Open Banking encounters significant challenges in handling balance payments, which often involve large sums. A critical issue we have observed is the high failure rate of Open Banking transactions in these scenarios, leading to various negative consequences. The graph below, derived from automotive payments data from Cocoon's platform, illustrates the trend in acceptance rates for Open Banking payments, inversely correlated to the payment values:
This graph reveals a notable decline in acceptance rates as transaction values increase. For payments less than £2,000, the acceptance rate remains above 95%. However, as the value exceeds £10,000, the acceptance rate falls below 50%. Considering that the average price of a used car in the UK is around £18,000, it's evident that this declining acceptance rate at higher transaction values poses a significant challenge for automotive retailers.
For customers, the failure of an Open Banking transaction can be more than just an inconvenience. It translates into a frustrating experience, potentially eroding trust and satisfaction. This is particularly critical in balance payments, where the payment is often the final stage in completing the deal.
For sales staff, these failures introduce operational headaches. Each failed transaction means additional time spent in resolving payment issues, delaying the sales process, and straining customer relationships. In an industry where efficiency and customer experience are paramount, this is far from ideal.
Automated Bank Transfers: A More Reliable Alternative
In response to the challenges presented by Open Banking in balance payments, our team delved into the data with a clear objective: to find a solution for automotive retailers that captures all the benefits of Open Banking — like instant notification of funds and flat transaction fees — but without its limitations.
We call our solution: Automated Bank Transfers. This method combines the advantages of Open Banking, such as instant fund notifications and consistent fees, without its drawbacks in handling high-value transactions.
Automated Bank Transfers are suitable for balance payments, mitigating the risk of transaction failures prevalent in Open Banking for larger sums. This approach still provides a great payment experience for customers and staff but also supports the swift pace and operational efficiency required in automotive retail. It's a strategic move towards a payment process that is both dependable and efficient for higher-value transactions, addressing the specific needs of the sector.
Open Banking: Effective for Deposits, Service, and Parts
It's important to note that Open Banking still plays a vital role in other aspects of automotive retail payments. For deposits, service payments, and parts transactions, where the amounts are typically less than £2,000, Open Banking offers a viable and cost-effective alternative that can sit alongside traditional card payments.
In these scenarios, Open Banking can significantly reduce transaction fees and speed up settlement times, contributing positively to the dealership's operational efficiency and cost management.
In conclusion, while Open Banking has its merits in certain areas of automotive retail, it falls short in the context of balance payments due to high failure rates and the subsequent negative impact on customer experience and operational efficiency. The adoption of Automated Bank Transfers for balance payments emerges as a more reliable and efficient solution.
For other transaction types like Deposits, Services, and Parts, Open Banking remains a valuable tool to complement card payments, helping dealerships to manage costs and enhance transaction speed. As the payment landscape continues to evolve, it's crucial for automotive retailers to stay adaptable and choose the right payment solutions that align with their specific needs and customer expectations:
We’ve updated our map of the payment landscape for automotive retailers above and, as always, we are happy to provide an honest assessment of your current payment operations and opportunities for improvement. Please don’t hesitate to contact us.