Account to account payments through open banking are set to boom a retailers seek lower-cost options for online shoppers, writes Roger De’Ath, Head of ecommerce, TrueLayer.
Amazon announcing it would end its relationship with Visa, and from 19 January 2022, no longer accept payments from the card giant’s UK credit card customers, is significant. One of the largest ecommerce businesses referencing “the high fees Visa charges for processing credit card transactions” cannot be underestimated even if, ultimately, they negotiate and continue to work together.
There are multiple factors behind this decision, however, Amazon has already removed Visa cards in Australia and Singapore in recent months, so this cannot be seen in isolation of one decision in one market.
There is a wider trend at play. The British Retail Consortium, the Payments System Regulator (PSR) and numerous business leaders have raised the spectre of card fees and how they are affecting merchants of all sizes, increasing their transaction costs and directly impacting their revenues.
With online sales now representing more than a third of total retail in the UK and growing at an exponential rate, retailers are under increasing pressure to optimise their online presence and checkouts to attract customers and drive sales.
The high cost of cards
The hard truth is that cards have reached their expiry date in a world of instant payments and borderless commerce. For years, they have been retrofitted into online checkouts, creating an invisible web of hidden costs and unwieldy payment structures.
The high cost of card payments is the biggest pain point for many retailers - and clearly, Amazon is one of them. This cost comes from the processing fees and the high number of chargebacks associated with the increasing volume of returns, as well as the increased risk of fraud.
For those with high average order values, namely, orders that often exceed £500 (eg. luxury goods, travel, electronics and furniture), annual chargeback costs can be a significant financial burden, with £235k being the eye-watering average annual cost per retailer.
The commercial impact of cards’ inefficiency also cannot be overstated when it comes to customer experience. How often have you tried to buy something only for the card to not be accepted - whether through mistyping details or a fraud block? The risk of customer drop-off at the checkout is high and impactful.
Card conversion will be further impacted by the introduction of Strong Customer Authentication (SCA), which is designed to help combat fraud by asking the customer for additional information to confirm the transaction. It has been live in the EU since 31 December 2020 and is due to come into force in the UK for ecommerce transactions on March 14, 2022.
Most examples live today show it adds significant friction to the online checkout experience. We analysed a number of SCA payment flows and found that consumers typically have to go through 10+ steps to complete a purchase. Some studies suggest it could reduce conversion on card payments by 30 per cent, and businesses could stand to lose billions in online sales.
Open Banking: already delivering a better way to pay
The opportunity and need to create the ultimate online shopping experience, where payments aren’t just retrofitted for the online world, is huge. With the tech available to us at our fingertips, there’s no longer a good excuse to solely rely on debit and credit cards. It’s increasingly evident that shoppers are ready to embrace the new ways of paying that improves their overall experience.
The UK is leading the way thanks to account-to-account payments delivered through the Open Banking regulation. Shoppers can connect directly to their bank account at the checkout, so that payment can be taken within seconds. Payments are authenticated directly with the bank. There’s no need to enter card details or fill in forms – payment can be made in a few taps with face recognition or a fingerprint – making them SCA compliant and drastically reducing fraud.
It is advantageous for the merchant too, as funds are received immediately allowing them to ship the goods with total confidence.
As a payment method built for the mobile era, it lowers the cost per transaction while also playing an important role in building a smoother checkout experience that increases conversion as retailers create the intuitive online experiences their customers expect.
The data bears this out: these payments have an acceptance rate 15-20 per cent higher than cards online across checkout and that means higher revenues for the merchant.
The ability to process refunds promptly and in a seamless way, without the need for customers to jump through hoops has become an increasingly important part of the customer journey.
Refunds, a huge issue for retailers, were often thought to be the Achilles heel of open banking because it does not include these as a native feature. However, by upgrading the open banking experience we have also improved the refunds process; removing friction and delay to make refunds as instant as the initial checkout payment.
A merchant-led evolution
As an industry, we’re often asked how open banking ends up going mainstream. The answer is merchant adoption outside of financial services, replacing cards and other methods as the primary payment option. You can already pay your taxes at HMRC, or buy or sell your car on Cazoo using open banking and that is just the start.
As the Amazon/Visa news has revealed, ecommerce at large is creating huge demand for shopping experiences that are quicker, keep customers’ data safe and crucially, are more cost-effective. Account to account payments through open banking are the necessary next step in that evolution.
The views and opinions expressed are not necessarily those of AltFi.
15 October 2019
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