Since PSD2 went ‘live’ in September 2019, a raft of Payment Initiation Service Providers (PISPs) has emerged, enabling consumers the fast, convenient option of paying straight from their bank account, as well as offering a range of benefits to merchants.
Open Banking ePayments (OBeP) are now one of the fastest-growing payment methods in EMEA, where they are set to overtake both credit and debit cards in popularity by 2023.
So, over the course of the first year, how have Open Banking payments shaped up – and what’s on the road ahead?
Facing the friction
It has been a bumpy journey for many involved, with a lot of APIs initially failing to deliver a simple user experience.
For example, in some cases, the OBeP process has involved numerous redirects and excessive security measures, such as requiring customers using a PISP to go through two or more Strong Customer Authentication (SCA) processes. Other banks have claimed that allowing third parties to access their apps was too complex and have instead relied on other authentication routes that offer a more stilted user experience. An intervention by the European Banking Authority has helped this situation improve, by pushing banks to ensure their process flow is more fluid, with fewer steps for consumers.
As time has gone on and initial API niggles have started to settle, there has been an increasing trend towards using the mobile phone – and biometrics, in particular – to authenticate consumers using a PISP.
This has been a huge step forward and allows online banking payments to begin delivering a seamless online user experience.
Cards versus OBeP
So, why are OBeP’s gaining so much ground over traditional card payments, particularly online?
Cards were not really invented for ecommerce, they were invented for use at in-store point-of-sales and they have been retro-fitted to work with newer, digital channels.
When compared with cards, Open Banking payments have full geographical coverage and they are much more secure. Merchants also still have to contend with the problem of card fraud and rising card processing costs – issues that are diminished by OBeP.
Despite all this, cards are often still a preferred option for merchants. This is because, in the majority of cases, online banking payments still lack several key functionalities. The root of this problem is that the vast majority of PISPs can only facilitate payments initiation and not deliver a complete payments solution. Merchants using an ‘initiation-only’ provider will still need a refund (or payout) solution, reconciliation services and fast transaction processing abilities.
With many PISPs, merchants also can´t be sure that the payment will clear, because so many are relying on batch processing. This is a very big problem for merchants, making OBeP (via an initiation only PISP) riskier for them to accept. When a direct bank payment is initiated, it’s very valuable for the merchant to receive an immediate notification from their payment provider so they know that the payment has actually arrived. This is particularly important for digital goods merchants who need to fulfil orders (such as music downloads and games) instantly.
So, in short, OBeP needs to go through a PISPs that offer a full range of benefits in order to be a good enough option for merchants, compared to card acceptance.
Room for improvement
One advantage of Open Banking payments is that they should be able to use the instant payments rails. If the money can be instantly moved, or at least validated via the PISP, merchants can fulfil orders faster and with more confidence – supporting a better overall buying experience. Currently, this immediate transfer of funds is not supported by many PISPs.
Consumers also expect end-to-end consistency across their payments experience. This means they want the same speed and convenience from a refund as they do from the original payment. Instant refunds are a feature that is proven to increase customer loyalty. In fact, in our recent ecommerce survey, 65% of customers said the speed and ease of refund affects where they choose to shop, while 95% said same-day refunds would make them more loyal to a merchant.
Of course, the immediate refund functionality that supports a seamless customer experience is also beneficial to merchants, since it helps them manage cashflow, reduce costs and minimise administrative complexity.
This is one of the many issues that Trustly addresses - through our account-to-account, or intra-bank model. Because we are embedded in the payments flow, we can receive and settle funds locally and instantly – without being subject to delays caused by batch processing. This not only facilitates instant payments, but instant refunds too.
The future of OBeP
So, the first-year wobbles are fading, but Open Banking has still got a long way to go and a lot more to give to reach its full potential – which is to make ecommerce truly simple for both consumers and merchants.
There is also room, over time, for a global payments network, built on Open Banking, which can start to replace cards more broadly and give both consumers and merchants a better, more efficient payments experience.
This will only happen if Open Banking payments are delivered by full-service PISPs, like Trustly, who can connect via multiple channels and are embedded in the flow of funds. This model powers the real-time movement of money, efficient reconciliation, merchant fund notifications and a greater volume of settled payments.
A bank transfer payment via Trustly also offers a slicker, more trusted customer experience, with no manual data entry or additional steps for the consumer, a fast process, and a consistent experience for both purchases and for returns or other customer payouts. At Trustly, our approach is focused on delivering the gold standard of OBeP services and we’re proud that this dedication has earnt us recogntion as the Best PISP at the 2020 Merchant Payment Ecosystem Awards.
The editorial was originally publihed in Global Open Banking Report 2020, which follows the journey from Open Banking to Open Finance and Open Data Economy, and provides key insights about the benefits of Open Finance for different areas of financial service
About Ciaran O’Malley
Ciaran is the Head of Commercial Strategy at Trustly. He has been involved in Open Banking in the UK and other industry initiatives such as SWIFT’s Pay Later API standard. He has a background in investment banking. Firstly at Credit Suisse as a Derivative Quant working on the implementation of CRD IV and laterally in Financial Institutions Mergers & Acquisitions at SocGen and Nomura.
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