The digitalisation of commerce continues to drive customer demand for new payment solutions that are faster, more transparent, less risky, and cost efficient. In Europe, payment initiation services (PIS) will enable banks and other PSPs to offer open payment solutions to their corporate and SME clients. Open payments are account-to-account payments initiated by a PSP directly from the customer’s bank account (with the customer’s consent) and credited to the merchant’s account. Open payments are expected to take an increasing share of European payment volume as a result of trends in client demand, the availability of instant payment infrastructure, and regulatory support.
Open payment use cases can help companies to provide better payment experiences, not only for ecommerce but also in other online environments – to replace legacy payment methods such as bank transfers and checks. Examples include the following:
High fee environments, e.g., travel industry/airlines, luxury goods: Open payments enable high-value purchases (no risk), eliminate chargebacks, and reduce cost.
Repeat businesses with high velocity and returning customers: Such businesses can offer loyalty programmes to convert consumers to open payments.
Gaming/gambling industry: Clients are more used to a wider choice of payment methods, as issuer risk policies limit the use of cards. Open payments fit very well to the needs of this industry.
Companies with an online presence that only accept debit payments such as bank transfers, debit card payments, and checks: Using open payments will improve the reconciliation of receivables, as the payment reference is automatically included. An example is property/rental payments in countries such as the UK.
Financial services, e.g., money transfer, credit card repayments: One promising use case is to combine PIS with AIS to obtain a real-time credit score on a customer and provide instant loans at the POS (POS finance).
Recent Aite Group research commissioned by Token (The Road to Open Payments) shows that there is significant interest from PSPs to offer PIS and enable financial institutions and merchants to offer open payments to end users. Large banks and acquirers report that they will launch PIS in 2020. The research also includes PSPs that are already actively offering PIS in business-to-consumer and/or business-to-business applications (Figure 1).
Figure 1: Bank and PSP plans to offer PIS
Source: Aite Group interviews of 15 banks, PSPs, and payment solution providers in Europe, January to March 2020
Outlook for open payments
Bank APIs are not standardised and technically not fully ready, which makes it difficult to provide a consistent customer experience for PIS providers. One PSP reports that it sees conversion drop by as much as 50% when using APIs. In practice, this means that existing PISPs continue to use direct access or screen scraping rather than using bank APIs.
How to educate consumers and influence a change in behaviour – the user experience for open payments has to improve to reach adoption at scale.
There is no open payment scheme. Open payments would benefit from a Pan-European brand and experience, rather than each provider or merchant having its own brand and payment experience.
However, banks and other PSPs believe that these market inefficiencies will be addressed over time and that open payments will reach mass adoption in three to five years (Figure 2).
Figure 2: Provider view on strategic importance of open payments
Ten out of 15 respondents indicate that delivering open payment solutions is strategic for them, serving large clients and developing new payment rails. Others are taking a more tactical approach by working with partners to develop PIS or add open payments as a payment method to their gateway. Data also suggest that the large banks, acquirers/PSPs, and payment networks are driving new open payment initiatives, not the fintech startups. European banks report that the demand from fintech companies to develop open payments/PIS using bank APIs for end users (consumers, small businesses) is low. This could lead to a scenario in which the existing fintech providers of open payments (Klarna, Trustly) will get strong competition from the large incumbents – a rather ironic outcome given the intent of the PSD2 to support new players to compete with the banks. 2020 will be a telling year in which this story plays out.
This article was published in our Payment Methods Report 2020, an extensive overview of what’s new in how people pay in the most relevant ecommerce markets.
About Ron van Wezel
Ron van Wezel is a senior analyst for Aite Group’s Retail Banking & Payments practice. His research covers market and regulatory trends in the payments space, with a focus on Europe.
About Aite Group
Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. Headquartered in the US, Aite Group works with its clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they remain at the forefront of industry trends.
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