A consumer's view on Open Banking
Let us get one thing immediately out of the way: whilst the term ‘Open Banking’ might be self-explanatory for those working in the financial services sector, for the typical consumer it does not mean anything, or it is understood to be something completely different. As the host of a webinar I recently attended pointed out, the most common perception of ‘Open Banking’ among consumers is that bank branches are open 24/7 – thus, allowing payments to be initiated on a Sunday over the counter. It is an interesting observation that the consumer, i.e., the one person who decides how the payment will be undertaken, does not know what ‘Open Banking’ means.
This raises another question: is it actually important that the consumer knows what it is? Does the label on the tin really matter? Would it not be much more important to know what the content of the tin is? The consumer does not need to know that Open Banking is the process of enabling third-party payment or financial service providers to access their banking information for account information purposes or payment initiation. What the consumer should know is that these are Account-to-Account payments, most commonly from their own bank account, and that the service provides real value, whether that is incremental convenience, streamlined user experience, or economic benefits.
Why is consumer perception important? Without delving into detailed descriptions of economic theories, it is critical to understand that the merchant payments market is two-sided, where payers (i.e., consumers) and payees (i.e., merchants) have different needs or reasons for choosing one payment method over another.
For successful sales, merchants need to offer the payment methods that customers are likely to prefer or look for. This is a constant challenge in the wider world of Alternative Payment Methods (APMs), where merchants will need to assess which APMs are meaningful and which ones their customers actually want to use. This challenge is equally relevant for Open Banking payments. Are the needs and benefits related to Open Banking payments truly aligned between merchants and their consumers?
The merchants’ perspective
It has been well documented that there are four key benefits for merchants to accepting Open Banking payments:
Lower costs – especially when you consider card payments, there is a range of different fees that merchants would need to pay. Starting with the Merchant Service Charge as the biggest item, it can extend towards gateway fees, 3DS or PCI compliance fees, or (network) tokenization fees. Fees for Open Banking payments are lower than the aggregated fee level for card payments.
Greater security/lower fraud – like payment cards, Open Banking payments need to comply with Strong Customer Authentication (SCA). In most cases, this is already being facilitated via the redirection to the online banking environment of the customer.
Faster settlements – Open Banking payments are being confirmed almost instantly, and thereby, they provide an immediate cash-flow benefit to the merchant. Also, because receipt of payment is confirmed very quickly, goods can be shipped right away, which improves the consumer’s experience considerably.
No chargebacks on Open Banking payments – because Open Banking providers instruct instant bank transfers on behalf of the customer, there is no built-in chargeback mechanism.
So the benefits for one stakeholder, the merchant, in this two-sided payment acceptance market are clear. But what about the consumer?
Benefits – The Way Forward
Features such as added security and transparency around payment flows are equally beneficial to consumers as they are for merchants. But one big challenge remains. We are all creatures of habit, and we have all established our preferences in how we want to pay. For consumers to change payment habits, it will require something better, something more convenient, or something that has a real additional benefit to it. For example, having no chargeback mechanism might be beneficial to merchants – but for consumers who are accustomed to a safety net from familiar card payments, this means additional risk, and it translates into hesitation for mass adoption. Fortunately, there is nothing to stop Open Banking payment providers from developing voluntary protections to cover certain types of purchases, if that is what is required by merchants and sought after by consumers. For some transaction types such protection will be needed (e.g. larger furniture items), whereas it might not be overly relevant for weekly food purchases.
Whilst it is early days for Open Banking payments, there is some evidence that adoption is growing. There are already well-established use cases in the iGaming or wealth management sectors where Open Banking payments are used to fund the customer account. The next step will be to establish a meaningful roll-out for Open Banking solutions as a viable retail payment method. As illustrative examples, Truelayer provides Open Banking payment functionality to Cazoo, an online car retailer, Trustly serves Norwegian Airlines, and most recently lastminute.com and token.io partnered with BNP Paribas to launch Instanea, targeted at BNP’s merchants.
There is a strong argument that merchants will need to take the lead to convince consumers that there are alternative options to card payments and other established payment methods. If there is a cost advantage to merchants, is there an opportunity to pass on some of those cost savings to consumers? Could they be convinced to change their well-established preferences by receiving additional loyalty points if they were to use Open Banking payments, for example?
As iDEAL in the Netherlands has demonstrated, there is a space for Account-to-Account retail payments – but to push the adoption of Open Banking payments, merchants need to share some of the associated benefits in order to overcome any scepticism that consumers still show today.
About Volker Schloenvoigt
Volker is a Director at Edgar, Dunn & Company (EDC), based in the London office, and he heads the European Acquiring Practice. Volker has provided consulting advice in payments for over 20 years and has developed significant experience in digital financial services from working with banks, merchants, card payment schemes, technology vendors, and regulatory bodies in different geographies. He has a track record in strategy development and deep expertise in profitability improvement, strategic planning, financial modelling, and M&A advise.
About Edgar, Dunn & Company
Edgar, Dunn & Company (EDC) is an independent global payments consultancy. The company is widely regarded as a trusted adviser, providing a full range of strategy consulting services, expertise, and market insights. EDC expertise includes M&A due diligence, legal and regulatory support across the payment ecosystem, fintech, mobile payments, digitalisation of retail and corporate payments, and financial services.
This article was first published by The Paypers, the Netherlands-based independent source of news and insights for professionals in the global payment and e-commerce community.