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Opinion Digital Banking
The final frontier in open banking payments
Open banking-based payments have not yet emerged as a truly competitive alternative to mainstream methods such as credit cards but change might be starting, writes Nick Raper, Director at Nuapay UK
As it stands, few consumers truly understand the full scope of what open banking offers. Yet, this shouldn’t be a concern if the services and benefits of open banking are made accessible to end-users.
This is precisely what we’ve been seeing in the UK. With accelerated interest due to the rise in adoption of digital payments during the pandemic, merchants and consumers are embracing open banking services as a new way to authorise frictionless, low-cost, instant and secure transactions.
Open banking payments have facilitated a range of solutions with which we are now highly familiar, including “Pay at Table” mobile ordering, QR based solutions for POS, and request-to-pay or pay-by-link invoicing solutions. Many of these methods are likely to remain, moving from a temporary trend to permanent shifts in behaviour.
The UK, however, is not the only market seeing growth in open banking. Across the globe, we’ve seen tremendous strides being made in realising and implementing open banking services. Notably, Europe, parts of Asia and Latin America have all made considerable progress led by governments, regulators and industry pioneers.
And while open banking adoption is firmly accelerating, where we are seeing real growth in open banking payments is where it is coupled with strong, underlying real-time payments technology and infrastructure.
The US opportunity
Open banking represents a huge opportunity for the US. As the largest financial economy, the US market certainly has the most to gain from innovation and new solutions. Yet, with little to no real-time payments infrastructure or regulatory oversight, Open banking-based payments have not yet emerged as a truly competitive alternative to mainstream methods such as credit cards. This is despite significant demand, as merchants and payment providers aim to avoid the particularly high costs of existing solutions.
Interchange fees, usually set by Visa or Mastercard, can be crippling for merchants that have to pay each time a customer uses a credit or debit card to make a purchase. A further increase in Visa and Mastercard’s fees is expected to take effect next year, despite complaints about the impact this could have on the market and an investigation by the Justice Department into whether the rise signals anticompetitive practices from the two card processors.
Chargeback fees add further costs. For merchants in the US, as well as contending with the annoyance of a lost sale, they need to cover the significant fees associated with processing these refunds. While across the globe these fees are standard, in the US, costs continue to increase and are yet to be addressed by regulators. Merchants can lose two to three times the transaction amount once operation and customer acquisition costs are added to a $20 to $100 chargeback fee.
With open banking, as card networks are avoided altogether during the payment process, fees of any kind are much lower. Moreover, merchants can avoid any chargebacks generated due to fraud as payments are authenticated directly between consumers and their banks. The consumer never needs to hand over their banking details or passwords – meaning open banking payments are extremely secure.
The argument for open banking payments in this market is clear.
Change is on the horizon
Change is nigh. The US market is set to see significant infrastructure uptake soon, despite introducing real-time payments much later than other similar markets. Two real-time payment services are now live - The Clearing House, and Zelle - with a third, FedNow, underway for launch in 2023. FedNow, from the Federal Reserve, will enable real-time payments for banks of all sizes. As a result, the ACI is forecasting total real-time ACH payments transactions to grow at more than 42 per cent per annum over the five years to 2024.
With FedNow waiting in the wings, an increased focus on product investment and development in the US market is a certainty. In the meantime, the focus must turn to encourage merchant buy-in, which in turn will drive consumer awareness as the benefits of open banking payments become more tangible. With Plaid, Finicity, and MX already demonstrating success within the market for data-based open banking services, we will likely see increased interest from players looking to expand to payment services as well.
A global network is in sight
Significant progress is being made both in terms of open banking adoption and awareness of its benefits throughout the markets where real-time and account-to-account payments infrastructure has been prioritised.
The US is also now making similar developments so that the prospect of a global, real-time payments landscape has become a much closer reality. Change is coming and it’s exciting. There will be challenges along the way but the benefits that everyone across the ecosystem will realise will hugely outweigh these. Real-time, account-to-account payments are the future.
The views and opinions expressed are not necessarily those of AltFi.
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