In last month’s newsletter, we took a deeper look at Open Banking and the recent successes that various use cases in this ever-developing industry segment appear to have. In many parts of the world, Open Banking has really gathered momentum. But we started wondering whether the success of Open Banking in a wider sense is connected with the growth in Open Banking based payments. Admittedly this is only data from the UK, but the low ratio of 3.5m Open Banking based payments compared to 5bn API calls in total suggests otherwise.
Is Open Banking succeeding when Open Banking based payments are not?
In part 2 of this mini-series, we are looking at this question and what role Open Banking based payments are likely to play. Let’s start by taking a step back again and consider the two types of providers that the PSD2 ‘created’.
- Account Information Service Providers (AISPs) – these are providers that leverage data access to different accounts or services to develop propositions that support a wide range of use cases such as lending or even wealth management
- Payment Initiation Service Providers (PISPs) – these are providers that leverage Open Banking infrastructure to facilitate payments or initiate payment orders in the online channel
So when it comes to Open Banking based payments, it is the PISPs that we need to consider. Across the globe, there are literally hundreds of PISPs with different solutions, but all these payments have something in common. Payments are initiated from a bank account.
Let’s take the example of Trustly to illustrate how it works.
When making an online payment, the consumer selects Trustly as the payment option. Trustly has connections to a wide range of different banks in Europe but also North America. A drop-down list opens and displays all participating banks, and the consumer chooses his/her own bank and gets subsequently redirected to the online banking environment of that bank. The usual log-in details are being used, the transfer for the amount (which is pre-populated) is being initiated, and the online banking session is being closed down.
For such payment services to succeed, there are a number of key criteria to address:
- Large number of bank connections and high availability of APIs
- Usage of a Real-time payment scheme which allows for instant clearing of funds and balance updates
- (As always) User Experience – the payment service needs to be secure and easy to use but, more importantly, add something different that other payment instruments can’t provide
- Regulation – in order to create trust, there needs to be a regulatory framework for Account-to-Account transfers covering liability, security and integrity
None of these success criteria is impossible to reach. Still, the difference to many other Open Banking use cases is that Open Banking based payments compete with a wide range of established and consumer accepted payment instruments. There are payment cards and various alternative payment methods that Open Banking based payments will need to compete with. This is certainly the case in most markets but to show that it is possible, we can take a look at Brazil. Brazil acts as a good example where an Open Banking based payment method (PIX) made significant and quick inroads largely driven by the fact that only 5% of Brazilians are holding a credit card.
PIX was launched by the Central Bank of Brazil in late 2020 with the objective of reducing cash transactions and becoming a viable alternative to local payment methods such as boleto. After six months in action, PIX already has over 85m users and processed close to 13bn transactions. It is being used for payments but also for P2P transactions leveraging the instant payments infrastructure (average settlement time is 10 seconds - not quite instant but close enough).Brazil might be more of an exception to the norm.
In most other markets, Open Banking based payments are about optionality and not so much about the total replacement of other types. It is an Alternative Payment method whose implementation, in the case of online retail payments, needs some consideration.
- What is the cost of Open Banking based payments? In most cases, it should be cheaper than cards, for example.
- How easy is it to implement and maintain ongoing operations (e.g. are you going for a single gateway integration with one API or are you looking for integrated settlement and reconciliation)
- How do you deal with the lack of refund capabilities today? Will this impact the user experience?
There are many things to consider. The combination of real-time payments technology and Open Banking regulation should be the perfect breeding ground for attractive account-to-account based payment propositions. In the not too distant future, they will play an important role and be a relevant option due to low costs and faster transaction speeds. But some of the relevant user experience issues (security and liability framework for payments, chargeback/refund functionality) will need to be solved before real trust will be established. Until then, it is just another option to pay.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).