UK Car Dealers Leverage Open Banking to Cut Fees

Payment processing fees are an unavoidable pain point for many businesses, both large and small, but for merchants in the automotive sector, the impact on their bottom lines can be particularly severe.

“These businesses turnover hundreds of millions of pounds a year in revenue but they make very small margins, so if you’re taking that payment on a card, even if you’ve got really good rates, with your acquirer you might pay upwards of 5% – and 5% of £100 million is actually quite a lot,” Sam Meekins, head of product at Cocoon, told PYMNTS in a recent interview.

The London firm operates a software platform that facilitates payments for merchants in the automotive market, gaining wide visibility over the significant payment processing fees car dealerships are subjected to.

Read more: Cocoon Teams with EML’s Nuapay to Drive Digital Payments for Car Dealers

To alleviate this major pain point for their merchant clients, the company recently announced a partnership with open banking payments firm EML Nuapay that will enable merchants to make fast and secure payments on automotive purchases directly from their bank accounts using open banking, bypassing costly card scheme fees.

Read interview with EML Nuapay CEO: UK Merchants Cut Costs by Adopting Open Banking Payments

“Our proposition with [EML] Nuapay as the underlying infrastructure provider is to provide our business clients with a cheaper, faster and more secure way to take payments [on Cocoon’s platform] that’s delivered through open banking,” Meekins said.

Meekins pointed to the fact that the average order value for a dealership is about £1,000 (about $1,340) and because oftentimes these payments are made remotely including over the phone, they are riskier and prone to higher acquiring fees in the range of 0.5% to 1%.

Cocoon can help cut down that cost considerably, Meekins said. “That on a per payment basis is £5 to £10 and typically we can do it for 75% less than that,” he noted.

Gradual Shift To Open Banking

Open banking has transformed the financial services market, allowing consumers to share their banking information and enabling companies like EML Nuapay to use that data to build services better tailored to the financial needs of consumers.

But according to Meekins, not all their automotive customers have fully embraced the technology because some of their customers may not have mobile banking apps or may simply prefer spreading payments over several installments using a credit card, instead of having the money immediately deducted from their current account upon payment.

In addition to this, he said it was only a few years ago that some car dealerships stopped accepting cash and checks as a payment method, a transition that didn’t sit well with some of their customers and has made adopting open banking a risky attempt for them.

“What they’ve [dealerships] said is we’ve got 25% of [our] customers that we think are going to be really hard to shift over to open banking, so we don’t want to use your solution,” Meekins explained.

So, in order to serve all their customers on a single platform, including those who can’t use open banking or are not yet ready to let go of their legacy technology, Cocoon also offers a card-based solution alongside open banking technology.

As Meekins said, even though the pandemic has accelerated the shift to digital payments, it would take time for all merchants to get on board.

“It’s definitely going to be a gradual shift, but the pandemic has massively accelerated the use of digital technology. Two years ago, QR codes weren’t popular, and now we’re talking to merchants [who use them] so I think that has been accelerated, but [digital payments is still] a challenge.”

Combating Fraud

The partnership with EML Nuapay is also helping to combat fraudulent activity by giving merchants the tools to easily detect suspicious transactions which they would have previously missed.

Referencing one of their automotive customers who, before using Cocoon, was the victim of fraud, Meekins said the salesperson at a dealership approved a transaction for a car reservation, only to find out later that the card details provided by the customer over the phone were linked to a stolen card.

“The security of this process is very bad because anyone could have picked up that card off the street,” explained Meekins, who said that without knowing, the merchant delivered the car during the pandemic once they believed they had secured the deposit.

After the owner of the stolen card eventually contested the transaction, the business ended up being liable for £30,000 ($40,230), a huge loss that was completely preventable, he said.

Now with open banking, Cocoon can rely on its strong customer authentication and the use of biometrics on users’ phones to authenticate its payments with bank-level security. “It greatly reduces the possibility of fraud and that’s a perfect example of how that’s [open banking] helping,” he said.

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About: Forty-two percent of U.S. consumers are more likely to open accounts with FIs that make it easy to auto-share their banking details during sign-up. The PYMNTS study Account Opening And Loan Servicing In The Digital Environment, surveyed 2,300 consumers to examine how FIs can leverage open banking to engage customers and create a better account opening experience.