Is open banking the future of payments?

Is open banking the future of payments?

By Eren Muduroglu, Senior Client Engagement Manager UK at leading payment acceptance brand exactly.com, talks open banking, the good and bad, and why faster consumer take up will be reliant on more joined up thinking from banks, technology suppliers and merchants

We can throw around impressive growth statistics around Open Banking (OB) over the last three or four years but as it has come from a very low point this could be somewhat misleading. In order to get a true picture of its potential we should look at what it does well and where it fails.

When it comes to payment initiatives it is always good to look first from the perspective of the consumer, because if the process is not user-friendly it will impact on sales completions and take-up will be slow.

Consumer uptake is growing, fuelled by merchant adoption as a checkout option and the implementation of open banking by HMRC for tax payments. Reports suggest there are currently seven million UK users.

It’s a fine line to tread. If the user experience is unsatisfactory then consumers will typically not try twice. Given that OB payments take the user to their mobile banking app for payment authentication it makes sense to assume the payments journey for payments conducted on mobile phones are relatively more seamless than those taken on laptop or desktops.

The need to use your mobile phone to take an image of a QR Code and open your banking app may prove too restrictive for some and impact the checkout completion.

That said as more and more payment journeys are pushed towards 3D secure authentication methods, consumers are becoming more tolerant and indeed feeling their money is safer, by going through these anti-fraud procedures.

Some additional points to consider from a consumer perspective are the psychological boundaries of a bank payment being absolute.

There is no, or certainly a longer, route to getting your money back if the product or service is not as advertised. With cards the option to create a chargeback and the presence of buyer insurance in some cases gives this payment route protection. The other card option that OB does not cover is credit. OB is in its early stages, and we can be sure that in the same way this innovation has grown, the user journey will adapt in time, with banks potentially taking a more active role in the process by offering credit lines and specific buyer protections.

Current barriers to uptake can be sector specific. Transaction size limits can be restrictive to high value sales, returns and refund management can deter fashion and travel merchants, whilst there is still work to do on recurring payments which is slowing subscription-based sales.

The key merchant side benefits are widely touted as reduced fees. Studies show on average a reduction of around 50% over other methods.

Typically, OB is using a transaction-based model with fees ranging from 0.10p to 0.20p per transaction, with additional % fees added dependant on the business risk profile. Against a typical SME or mid-size business card fee of 1.2.-1.6% plus a similar transaction fee there is reason enough for OB to be attractive on a financial basis.

The second key benefit is the elimination of chargebacks. These cause multiple issues to a merchant, not least the fact that card schemes will increase fees or simply block accounts that show high rates of chargebacks.

For retailers the rapid increase of ‘friendly’ fraud is causing major concern. The concept of ordering a product and then instigating a chargeback from your bank or card scheme is rapidly increasing year on year and costing businesses £billions. OB removes this risk and puts the onus on the consumer to deal with the merchant to prove faulty or non-delivered products.

Early adoption is being seen in the gaming industry. This is more merchant led to help eliminate card fraud. Consumer take-up is mixed, partly due to a reticence from some players to have the name of a gaming company showing on their bank statement. They prefer wallets.

Account-based payments tend to have an existing type saved for one click payments which makes it unlikely they will change with no apparent incentive. The main chance to push OB is at sign up and first deposit and here the lack of consumer knowledge of the platforms – many still want to put their brand name forward rather than a “pay by bank” link – is proving prohibitive.

The panacea for OB is Variable Recurring Payments (VRP). This opens a whole new world of opportunity for platform providers, merchants and businesses. There are multiple benefits, but the ones making the biggest headlines are a reduction in invoice late payments and bad debt and a more flexible and potentially cheaper approach to Direct Debit payments.

This said, VRP is some way off being live in a real-life business scenario.

Overall, the speed of progress of OB is going to be reliant on a more joined-up approach between banks, technology suppliers and merchants. Currently, banks are not sufficiently incentivised to push forward at pace and consumers are not sufficiently educated in the benefits to favour OB over cards.

Maybe if the banks were more progressive in their thinking around their online offer, they could offer credit wallets, product insurance, and refund requests, all the things that differentiate cards from OB, we would see the balance move away from the card scheme monopoly.