open banking
open banking

Todd Clyde, CEO, Token, writes for PaymentExpert on the growth of Open Banking and its role in the payment space as it continues to grow. 

Throughout 2021, it became clear that Open Banking-enabled payments are here and here to stay. The payments landscape is now fundamentally changing as we enter a new year, and Open Banking is driving the shift.

Accenture estimates that account-to-account (A2A) payments already represent around 13% of all e-commerce payments across Europe. A good start, but the barrier of reaching over 35 national clearing systems across the continent has historically restricted greater scale.

However, Open Banking now provides much easier access to these clearing systems, enabling A2A payments to better integrate into the flow of commerce. A2A payments can reach anyone with a bank account across a significant geographic footprint. At the outset of 2022, providers like Token are offering full open payments coverage in 13 EU countries, representing 210 million potential end-users of Open Banking services.

Traditional payment methods are on the ropes

Merchants are ready for this shift, having raised the alarm about rising payment costs.

Amazon, most notably, will no longer accept UK-issued Visa credit cards, citing high fees. Others will follow. According to the British Retail Consortium, UK retailers hit by ‘anti-competitive card charges’ spent £1.3 billion to accept payments in 2020, an increase of 18% from 2019. 

Peak card’ may be much closer than we thought.

I believe 2022 will see an early majority of merchants and direct billers incorporating A2A payments into their strategies. Firstly, they deliver significantly lower costs, typically between 2x and 20x lower than traditional payment methods and independent of payment values. As such, Wordline has flagged A2A payments as a ‘global payments megatrend’ for 2022.

They also deliver greater liquidity, offering instant settlement for merchants. But perhaps most importantly, they provide a seamless and secure customer experience – something that’s too often lacking.

Recently, I remember juggling my mobile phone and a card, trying to enter my card details to make a payment on a busy London train platform. “How’s this a good experience?” I thought. The answer is: it’s not. Being swiftly directed to my banking app to authenticate an A2A payment with my face or fingerprint? Well, that’s better than good.

Navigating those tricky headwinds

While there’s a lot of positivity in the Open Banking payments ecosystem, let’s be transparent: there are still several headwinds to navigate around network challenges and protection.

We must fight IBAN discrimination, an outdated (and not to mention illegal) practice where banks and merchants refuse to make or accept a payment from a non-domestic bank account.

Single Euro Payments Area (SEPA) regulation prohibits this, but it’s not fully enforced in member states. Nevertheless, recently there have been some encouraging developments in France, where authorities can now issue fines of up to €375,000 to those that discriminate against non-French IBANs. I hope to see other member states follow suit as the year progresses.

I don’t believe purchase protection should be a specific part of A2A payments, and regulation is already in place to mandate payment protection. But one key challenge is educating consumers about this fact. We also need a common dispute management mechanism. 

And the industry must go further with fraud protection. Open Banking can provide another avenue for authorised push payments fraud when online banking credentials are already compromised. I’d like to see Technical Service Providers (TSPs) and Third Party Providers (TPPs) step up and invest in fraud tools to help police this new ecosystem.

Encouraging tailwinds on the horizon

Despite these remaining challenges, there are also a number of forces propelling Open Banking payments adoption forward.

New Variable Recurring Payment (VRP) capabilities, for example, will unlock additional use cases for merchants and direct billers in the second half of 2022. Just as consumers programme rules for their smart homes and devices, VRPs will give them the ability to programme rules for their payments.

VRPs are likely to capture a significant share of subscription payments, such as streaming services and memberships. Less obvious but more exciting is their potential to enable consumers to replace their card on file with an ‘account on file’, putting A2A payments behind ‘Buy Now’ buttons.

The disaggregation of services from card payments will also pave the way for a re-bundling of services, like loyalty programmes and Buy Now, Pay Later, around A2A payments, which is good news for banks. Open Banking is an opportunity for them to go beyond data access and reclaim their position at the centre of the payments universe.

This year, I expect A2A payments to become the primary payment method for loading digital wallets, as well as a key part of the world of unified commerce, supporting omnichannel strategies in stores.

Through their Payment Service Provider (PSP), merchants can accept lower cost, faster A2A payments on their apps and websites. This year, Open Banking infrastructure will also mature to the point that consumers can scan a QR code to authenticate an A2A payment in a shop. This is not a theoretical use case, rather it’s a reality. For example, our partners (and first movers in open payments) at BNP Paribas now enable A2A payments in over 100 major home improvement stores in France.

Open Banking payments are fundamentally changing the payments landscape, and this is just the beginning. The threat they pose to cards is genuine. As PSPs and merchants look for the right open payments solution to get off the blocks this year, breadth of connectivity is key – as is working with the right partner at the cutting edge of Open Banking payments capabilities.