The main challenge for buyers (payment providers, gateways, and acquirers) in this market is identifying the most efficient and effective strategy for launching Open Banking payment capabilities whilst generating the highest revenue and greatest margins.
For some time, payment service providers have been squeezed between the card schemes’ rising fees and merchants demanding lower costs. The result: PSPs’ margins are eroding. Consumers and merchants are hungry for Open Banking payments, leaving payment service providers with three choices.
Merchants working directly with Open Banking aggregators to launch account-to-account (A2A) payment capabilities can disintermediate payment providers. Alternatively, payment providers can aggregate local A2A payment APMs (incumbents like iDeal, Giropay, and new entrants like Volt, Klarna Kosma, etc.). However, these pay notoriously little back to the gateway.
Payment providers’ third choice is to work with a partner like Token (which has white-label capabilities) to launch their own ‘private label’ Pan-European A2A payment solution. This is how smart payment providers will generate the highest revenue and margins as they deliver the Open Banking capabilities that merchants increasingly demand.
The adoption of Open Banking payments is gathering tremendous speed across the payments value chain, with many of the world’s largest payment providers, gateways, and acquirers currently preparing to launch Open Banking capabilities in the UK and Europe.
We project that as Variable Recurring Payments (VRP) come online over the next two years, the genuine threat that Open Banking payments pose to traditional payment methods like cards, wallets, and direct debit will become indisputable.
At Token, our vision is to be the leading Open Banking enabler for the payments industry. As the rollout of VRP progresses in the UK, we are enabling our partners to take this next step in the future of payments.
Token’s recent industry research revealed that VRP’s unique benefits will fuel a significant shift away from card-on-file and direct debit for subscription and utility bill payments. Over 80% of payment professionals surveyed indicated fast settlement times are a crucial benefit of VRP, compared to just 17% who reported the same for card-on-file and 2% for direct debit.
Token’s research also found that VRP could top alternatives based on cost, risk, security, and UX. If this comes to bear, we predict the killer app for Open Banking payments will be VRP for one-click ecommerce payments.
The SEPA Account Access (SPAA) Scheme’s development of a framework for Dynamic Recurring Payments (Europe’s equivalent to VRP) and premium APIs will be a game-changer for the future of payments and Open Finance in Europe.
The SPAA scheme will help Europe shift from a regulatory environment where banks may feel ‘forced’ to act towards a model of co-creating value within an ecosystem.
Under this scheme, European banks could charge fintechs for access to premium APIs that provide improved functionality beyond that required under PSD2, including premium APIs for Dynamic Recurring Payments.
While the SPAA scheme currently focuses on premium APIs for payments, we expect it to be an essential building block for the future of Open Finance in Europe.
Token saw 767% growth in traffic volumes in Europe over the past year, with the OBIE reporting a 190% increase in Open Banking payment volumes in the UK during the same period.
In the next five years, Open Banking payments are predicted to exceed USD 87 billion in Europe. Traditional payment methods such as cards and cash-on-delivery continue to lose share and are projected to account for less than a third of global ecommerce transaction value by 2026.
However, there are still barriers to overcome before Open Banking payments become a true pan-European alternative to traditional payment methods.
About half of European banks support SEPA Instant, with just 25% supporting initiation. Some banks also charge customers extra fees for faster transfers, which naturally discourages their use.
If SEPA Instant became the default payment rail in Europe, Open Banking enabled payments would be executed virtually in real-time. Merchants would benefit from faster payments, reduced fraud risks, and more transparent liquidity. Open Banking payments would also become even more attractive for use cases like topping up stored value wallets.
We expect the European Commission to legislate for EU-wide coverage of SEPA Instant payments in Q3 2022, and hope this will address both the cost and coverage of SEPA Instant.
IBAN discrimination (the illegal practice of refusing to make or accept a payment from a non-domestic bank account) is also an important issue that must be addressed. While prohibited under SEPA Regulation, this is still not fully enforced in some Member States. The elimination of IBAN discrimination would positively impact Open Banking payment success rates and see these become (even more) consistent across Europe.
This interview was first published in the Open Banking and Open Finance Report 2022. Click here to download the report.
An established operator of Silicon Valley software companies, Token CEO Todd Clyde has a twenty-plus year track record of bringing groundbreaking technologies to market, including e-learning, internet banking, mobile banking, and now open API banking. Token is Todd’s fifth technology startup, having navigated his previous four to successful exits, including one USD 2 billion exit.
As Europe’s leading Open Banking enabler, Token is driving the shift to faster, fairer, frictionless payments by helping payment providers successfully scale with account-to-account payment capabilities. With Token’s best-in-class AIS and PIS connectivity and white-label-ready platform, PSPs, gateways, and acquirers easily launch and manage Open Banking payment propositions.
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