In Europe, Open Banking is supported by a regulatory regime, the second Payment Services Directive (PSD2), which means that banks are required to share more customer information than ever before via Application Programming Interfaces (APIs). Banks will have to make available the necessary infrastructure through standardised interfaces.
This is believed to be the starting pistol for greater competition and innovation where merchants are expected to benefit from. In the UK, a real-life example of this is Mastercard’s acquisition of Vocalink and the launch of the ‘Pay-by-banking-app’ offering, originally based on the Barclay’s ‘Pingit’ service, which in turn rides rails of the Faster Payments Service. Mastercard’s Pay-by-bank-app is not Open Banking in the true sense of PSD2 Open Banking, but a proprietary solution with its own APIs designed for its distribution partners. Conversely, it is a taste of what Open Banking could bring to merchants in the future, not just in the UK, but all over Europe.
Merchants have not fully appreciated the huge implications of Open Banking for their own businesses and for their customer’s payment checkout experience. Potentially, part of the reason why merchants have not embraced Open Banking is because they imagine it is an initiative for banks to create new banking services. Payment service providers (PSPs) are already preparing commercial solutions, whereby merchants will be able to take advantage of the new SEPA credit transfers (SCT) which supports instant ‘SCT Inst’ payments. By using immediate payments rather than traditional card payments, merchants will not only receive their funds faster, but the processing fees are expected to be less than for card payments. Both online merchants, as well as traditional brick and mortar merchants, will benefit from these features. Innovative payment solutions and potentially new overlay services are on the horizon to take advantage of the fact that the underlying payment processing will be real-time. Call it instant or call it immediate, the genie is out of the bottle and Open Banking will be the catalyst. New payment services, such as Paym in the UK, or Swish in Sweden, have predominately been launched as personal-to-personal proposition. Similar payment services, designed for merchants, will be available to accept payments from consumers. These new overlay mechanisms will build on the real-time payment infrastructures, just as Paym is using the UK’s Faster Payments Service.
Looking outside Europe – Tencent, Alibaba, and alternative banking
In China, we have seen new digital ecosystems specifically designed for merchants, such as Tencent (WeChat Pay) and Alibaba (AliPay). Both examples have come from companies outside the financial services industry, whereas the incumbent European financial institutions hold the keys to the vault in terms of rich customer data, as well as trusted client relationships. These banks are being mandated through regulation to hand the keys over to fintech companies who view the opening of these customer data stores as an opportunity. It has been the non-bank fintech companies who have already demonstrated market traction – such as WeChat, Amazon, Google, Apple – and have gained trust amongst customers by building strong relationships and presenting data in new forms.
Some consumers believe they pay for their daily travel and groceries with Apply Pay, not with their Barclaycard, even when their Barclaycard is embedded in the Apply Pay wallet. The wallet facilitates the transaction and provides a transaction history, and in many cases, there is a richer set of information compared to what is held in the mobile banking app. The consumer is starting to see the value of these alternative banking and payment solutions provided by non-banks.
What does Open Banking mean for instant payments?
Merchants must educate themselves on the world of possibilities beyond Account Information Service Providers (AISPs), as defined by the PSD2, as well as understand the even greater possibilities, now that Payment Initiative Services Providers (PISPs) are expected to provide the next wave of service innovation. Open Banking will allow merchants access to all of the major banks as the APIs evolve. Merchants, for example, will be able to use loyalty programs to incentivise customers to initiate payments directly through their POS channels.
In summary, merchants should be more excited about Open Banking because of the following reasons:
they will be able to create new customer experiences to spend – for example, APIs will be imbedded in their existing sales channels to enable account information services, such as current account balance display, electronic receipts, and transaction history;
they will be able to initiate payments directly with the customer’s banks which will introduce better transaction processing fees and faster clearing of funds;
they will be able to generate relevant POS offers and discounts based on consumer spending habits and loyalty, like never before.
Edgar, Dunn & Company (EDC) is currently working with its clients to develop and design new and engaging, yet safe and frictionless customer-centric omnichannel shopping experiences. Open Banking will give merchants the opportunity to accept payments directly from a consumer’s financial institution without the need for an intermediary, as well as let them access a consumer’s financial data. This will provide merchants with better customer experiences through flexible payment initiation and faster refunds, improving cash flow by bypassing the card networks and reducing processing fees, fraud and chargebacks that are associated with card payments.
There is a long road to travel and the adoption of Open Banking and instant payments by merchants is expected to be slow. Consumers do change their spending behaviour but that change is typically slow and that should never be underestimated. It could be as long as 5 to 10 years before it will be considered mainstream.
This editorial was first published in the B2B Payments and Fintech Guide 2019 - Innovations in the Way Businesses Transact, which offers insightful editorials and use-case analyses on how to envision a proper regulatory and technological framework for safe and effective cross-border and instant B2B payments.
About Mark Beresford
Mark Beresford has over 20 years of consulting experience in the financial services and payments industry. He is a Director at Edgar, Dunn & Company (EDC), based on their London office, where he supports a variety of payment providers and retail clients all around the world
About Edgar, Dunn & Company
Edgar, Dunn & Company is an independent global payments consultancy, widely regarded as a trusted adviser since 1978, providing a full range of strategy consulting services, expertise, and market insight to a broad range of international clients including industry associations, issuers, acquirers, financial institutions, payment providers, etc
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