One of the key motivations behind Open Banking has been to enable the growth of alternative payment methods to cards. Policy drivers, industry development, and innovation have all worked together to deliver that in the form of Open Banking payments. The simplicity of the Open Banking payment chain is key to the resulting cost savings, reduced fraud, and consumer convenience.
All this, combined with the continuing growth of ecommerce sales, and the problems caused by the card network’s ageing infrastructure, has created the perfect opportunity for the ecommerce industry to truly embrace Open Banking payments. Here’s why:
After a slow start, Open Banking payments are growing fast
Open Banking payment solutions were initially slower to develop than other UK Open Banking services. But they are now growing consistently, with payment volumes rapidly accelerating in the last year. Successful payments made using Open Banking providers have increased from 280,000 in July 2020, to 1.83 million in June 2021 (OBIE. Successful payment initiations are based on data submitted by banks to Open Banking since July 2020). We can expect this number to increase as Open Banking payments become even more widely available. And while Open Banking can still feel like a nascent technology, there are already over 3 million Open Banking users in the UK (European Commission, Consultation strategy for the initiative on instant payments in the EU), which equates to 5% of the population. On its current growth trajectory, 60% of the population will be Open Banking users by September 2023. The growth of successful Open Banking payments, including in ecommerce, should follow suit.
Ecommerce payments are also growing consistently
Two trends in retail payments have created an opportunity for more Open Banking payments in ecommerce. First, cash has declined as electronic payments have grown. Second, ecommerce sales as a share of UK retail purchases have increased, highlighting the need for smooth customer journeys.
Internet sales as a percentage of total retail sales have steadily increased since 2006, and they accelerated significantly with the onset of the COVID-19 pandemic. In 2006, internet sales as a share of total UK retail sales stood at 2.8%, rising to 36.5% at the height of the pandemic.
Ecommerce payments have lower barriers to entry than POS payments because they don’t require merchants to upgrade their physical infrastructure to accept new payment methods. This means Open Banking payments can be integrated into the ecommerce customer journey relatively easily. Different payment options are typically displayed transparently at the online checkout, reducing friction, and expanding choice for consumers.
Internet sales as a percentage of all UK retail sales, 2006–2021 Source: Office for National Statistics, 2021.
Greater competition from Open Banking payments will bring about benefits for merchants and consumers
Without viable alternatives to card payments, merchants currently face persistently high fees for accepting electronic payments, as well as high rates of card-not-present fraud (UK Finance, Fraud: the facts 2021, pp. 16 and 18) and purchase abandonment. Greater competition from Open Banking payments can improve the situation for merchants and consumers in the following ways:
Lower fees for merchants
Open Banking payments can offer lower and more predictable merchant processing fees than card acquirers do. For example, TrueLayer’s average fee is less than 1% of the transaction value. Open Banking payments also do not involve additional fees that card payments typically do, such as authorisation fees, card terminal hire fees, PCI compliance fees, and chargeback fees.
Greater payments security
Consumers using Open Banking payments must authorise every payment with their bank using Strong Customer Authentication (SCA). SCA has been implemented for Open Banking in the form of ‘redirection’, which uses secure APIs to ensure banking credentials are kept safe, without the need for risky information-sharing among parties to a transaction.
Increased convenience for consumers
Core features of Open Banking ecommerce payments are convenient for consumers, by enabling a faster checkout process that requires less effort from them. For example, by pre-populating the merchant’s payment details, Open Banking providers reduce the steps of a transaction down to simply redirecting a consumer to their bank to authenticate the transaction (e.g., with a thumbprint).
International non-card payments show there is an appetite for card competition
While the growth in payment volumes and ecommerce sales are good signals for Open Banking payments, cards continue to be the status quo in ecommerce. Is it realistic to expect a new payment method to take a significant share of wallet from the likes of Visa and Mastercard?
To find the answer, we can look at non-card payment methods that have gained wide adoption in EU jurisdictions, like iDEAL in the Netherlands, Swish in Sweden, and Klarna-owned SOFORT in Germany.
These non-card payment providers have already achieved high rates of consumer adoption in ecommerce transactions, lower merchant fees compared to cards, and low rates of fraud. However, unlike these payment methods, Open Banking has the potential to be truly pan-European, giving it the scale to challenge the dominance of cards. TrueLayer is excited to see many merchants across ecommerce develop new payment experiences using Open Banking. We believe Open Banking payments will become the default way to collect ecommerce payments in the coming years.
This article is based on a report by an independent research consultancy with experience in payments and Open Banking, commissioned by TrueLayer.
TrueLayer has contributed to the Open Banking Report 2021. Click here to download the report.
About Jack Wilson
Jack is a former policy adviser at the UK banking regulator, the FCA. He led the FCA’s approach to regulating firms under PSD2 and assessing banks’ readiness for Open Banking. He is now TrueLayer’s Head of Policy & Regulatory Affairs.
About TrueLayer
TrueLayer is a global Open Banking platform that makes it easy for innovators in every industry to build better financial experiences for their customers by putting fintech at people’s fingertips. TrueLayer is backed by leading investors including Addition, Tencent, Temasek, Northzone, and Anthemis Group, and trusted by millions of consumers and businesses.
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