PSD2 has laid the groundwork for API functionality across Europe, however, UK businesses are uniquely well-positioned to benefit, says Yolt Technology Service's Leon Muis.
Open Banking - supported by the European Revised Payments Services Directive (PSD2) - has ushered the next phase in payments capabilities, opening the door to greater control over the way that businesses and consumers make and receive payments. Crucially, businesses now have more options for how they process customer payments.
Previously, these same businesses were forced to rely on a payment processing provider, such as Visa or Mastercard, to process transactions. Now, Application Programming Interfaces (APIs) are offering businesses an alternative solution. While still an emerging technology, APIs have the potential to reduce operational running costs for businesses across Europe, redefining the payments space.
Currently, nearly all businesses which process card payments are faced with high charges from their payment processing provider. For each transaction, they are typically charged a percentage-based fee, which can be thousands of pounds for companies that deal in high value or high-volume payment transactions such as airlines or online clothing retailers.
Additionally, retailers who experience high volumes of returns will also greatly benefit from the move to PIS. Products sent back to a vendor are most commonly refunded, but the vendor is never able to recover the losses incurred from the original payment processing fee. With PIS in place, these businesses can reduce total payment costs and thus minimise those loses whilst maintaining a customer return policy that is attractive (free) to consumers. This takes on even greater significance as the likes of Amazon an ASOS apply pressure on all retailers to offer customers free returns.
The move online
PSD2 has laid the groundwork for API functionality across Europe, however, UK businesses are uniquely well-positioned to benefit. This is due to the growing consumer preference for card payments, over cash. As of October 2019, internet sales reached 19 per cent of the total retail sales completed in the UK. The data also shows that the proportion of retail sales completed online has increased rapidly, year-on-year from just 2.8 per cent in November 2006.
With the convenience and accessibility of online shopping continuing to divert shoppers away from the high-street, it’s crucial that online providers can optimise the way they receive and process payments.
More choice for businesses
APIs, which have enabled Payment Initiation Services (PIS), now give European businesses the choice to process their payments in an entirely different way – significantly reducing their costs. PIS allow businesses to directly authorise payments from their clients, cutting out the middleman completely.
Rather than charging a percentage-based transaction fee from payments, API providers like Yolt Technology Services often charge businesses a tiered flat fee per transaction processed on their payment platform. This effectively means that the more payments a business processes, the higher the cost savings. By reducing operational costs, companies are free to pass savings onto customers or reinvest the money into other areas of the business.
Via this model of payments processing, businesses that either deal with high value, or a high volume of payments will find the benefits of PIS significant.
API functionalities have the potential to transform the way businesses process payments. Currently, a lack of awareness is slowing adoption, but there are a growing number of businesses beginning to see the cost saving potential of PIS.
At Yolt Technology Services, for example, we are averaging 15 million API calls per week. These calls can be anything from a form submission to a data request and provide the pathways necessary for processing payments.
Clearly, there are competitive advantages to reducing payment transaction costs and the number of businesses which make the switch from conventional payment processing providers to PIS will only continue to increase over the coming years.
To build the market for PIS the industry needs to incentivise the payments method, just as credit cards have been incentivised in recent years. It will take time for PIS to begin building market share in usage terms and the initial cohort of businesses which adopt the technology must also share the responsibility for helping to increase consumer awareness.