Payment providers have fundamentally changed global financial services, for the benefit of consumers, merchants, and businesses.
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“Fintech companies are the vanguard of change”
Technology is playing an immense role in transforming how, when and where we pay. The pandemic has no doubt sped up the appetite for change, but it would be remiss to think that it was the sole accelerant. The ubiquity and speed of the internet has carved out space for ever-smarter payment models to develop. Through the possibilities of open banking, payment operators are accelerating the pace of innovation, allowing for maximum flexibility, efficiency, and choice in the payments network. In real-time, we are witnessing the diminishing prominence of coins, paper money and - increasingly - card payments. We have seen an increased uptake in low-touch payment alternatives such as contactless payments, the use of QR codes, e-wallets and cryptocurrency. Low touch payments alone surged 46 per cent in 2021, according to findings by UK finance - part of a complex paradigm shift that will only continue to gain momentum.
The UK open banking legislation came into force in 2018, creating a sizeable market opportunity for emerging payment operators to develop new products and services traditionally offered by the big banks – including, savings, transactional accounts, mortgages, personal loans, debt collection, debit cards and credit cards. Apple’s recent $150 million acquisition of Credit Kudos is just the tip of the iceberg: we will continue to see new entrants making significant inroads into the payments space.
The road to implementation has been paved with frustration and uncertainty. Just 8 per cent of UK consumers are using open banking, according to latest research by the Open Banking Implementation Entity (OBIE). Despite this, there is a flood of optimism. It is estimated that by September 2023, 60 per cent of the UK population will be using open banking. Siamac Rezaiezadeh, director of product marketing at GoCardless, said “When you break down the maths, it makes sense to adopt in almost every use case. You can easily build a compelling case for merchant and consumer adoption.”
“We can’t deny the positive effect of regulation. You only need to look at countries where they haven’t tried to force the issue and you’ll find that they are significantly behind”
A blend of regulatory development and industry collaboration will be critical in driving greater mainstream adoption. According to Pete Janes, chief executive at Shieldpay: “There must be a framework to uphold standards and consumer protection without hindering opportunity. The key aim of open finance is to allow consumers to regain control of their finances and enable financial freedom. To achieve this, regulation cannot be a blocker. More sophisticated safe havens or sandbox environments for innovative companies to test ideas with regulators would allow for education of the market and open competition” Laura Xu, product manager at TrueLayer, adds “Regulators are our partners in making this happen but could do more in terms of having the enforcement power. It is not enough to say ‘follow our rules’. Unless they enforce it, there is no real incentive, and the outcomes will be barely usable."
As recently as March 2022, Fintech companies co-signed an open letter urging the Competition and Markets Authority to step up its efforts to open the market. Suzanne Homewood, Enterprise Sales Director at MoneyHub, said “We need clarity of regulation and speed. Competition is good for the merchants in terms of cost and settlement, and it is good for the consumer because it gives an option that is not reliant on cards. It is good for the market because it means new products and services on the back of open finance will start to open up.”
So how have banks reacted to the sweeping changes? Generally, with reluctance. Banks being ready to support, it’s not there. Banks fear they have too much to lose. Who wants to make it easy for consumers to go elsewhere, when so much time, effort and money is spent on getting consumers to utilise more services. This attitude goes beyond UK shores. Australia is moving even more slowly as banks resist timely upgrades to their real-time payment system (PayTo). Without a real commercial driver to force the issue, banks will lack the impetus to self-disrupt and loosen their control of payment initiation. A great deal of underlying work must be done to change the language around competition and foster the kind of collaborative - rather than adversarial - approach vital for progress. Janes adds, “Large incumbents must not see fintechs as a threat, but rather as a route to providing improved products and services for their clients.” Xu points to TrueLayer’s work with banks as a good example, “We must work to provide the same quality of service and savings back to the banks, who are also our merchants. This will ensure that they are motivated by our success and brought along the journey with us.”
“The simplicity of open banking is that it is intuitive. People already know how it works.”
Card payments were not initially designed for the online world. The first multipurpose charge card was designed in the 1950’s for Diners Club members to purchase meals without worrying about cash. This created a brand-new US-driven card payment industry. The challenge for any payment alternative will be to make good gains on payment cards’ 70-year head start in perfecting the offline experience: building consumer trust, user experience and global coverage. To smooth the way for greater adoption, the consumer experience must be, at the very least, on par with cards. Payment providers will need to do more with product marketing and messaging and ensure that their solutions are presented in language that the public uses and understands. This is already happening. The Revolut top-up experience is a good example of consumer on-boarding. By explaining what was happening and why, it eased consumers into ‘unlearning’ the old way and embracing the new, enabling them to move seamlessly from the Revolut app to their bank account, without concern.
Another main obstacle is coverage. The biggest barrier to open banking truly becoming global, is acceptance. Card payments are ubiquitous. You have the innate trust that you can use it in a similar city and the card payment will be accepted. This level of acceptance is vital to drive a real shift in usage. Xu adds, “merchants do not want to have a fall-back option, to initiate cross border payments”. “It is also deeply psychological; consumers look to the perceived protection from fraud that the use of a card provides. It’s less scary to use a card than to allow someone access directly to your bank account to transfer funds,” said Janes.
There is an important ‘but’ here, though: while card payments are still the instrument of choice for older users, younger users are more conscious of the fact that they are not in control. “Consumer awareness and understanding of privacy, data protection and data sharing has grown due to the introduction of the General Data Protection Regulation and well-known cases against large corporates,” said Janes.
“There is something happening on the consumer side, which is happening on a generational level,” adds Rezaiezadeh. People in their 20’s and 30’s care less about the rewards and incentives infrastructure attached to cards. “The incentives are diminished now. In the past, if you had an Amex card, there were real surprises. Today, you are lucky if you get a free coffee,” said Fiona Couper, chief marketing officer at Teamspirit.
Big digital changes have led to an erosion of cards as the ‘go-to’ means of payment. The magnitude of the shift was felt in January 2022, with the Amazon and Visa face-off. The dispute laid bare growing “consumer and retailer expectation, and concern around efficiency, experience, security, and value for money.” According to Homewood, “Klarna, Wise and Revolut are great examples of how readily people want to use a different type of payment system, which is frictionless”. Open Banking further extends this as it is intuitive to use, as authentication is from within their own banking app on their mobile device.
The British Retail Consortium estimates that merchants are paying over £100,000 a day, on transaction fees alone. Historically card use leaned heavily in favour of the end-user. Businesses who refused to bear the costs were ‘punished’ by reduced sales. Increasingly, merchants are turning to account-to-account payments to try to reduce costs. Merchants no longer have to choose between bearing all the costs or sacrificing their relationship with their customers. Account-to-account payment allows the merchant to skip the need to build a payment infrastructure. It shows the versatility of how you can build an interesting experience and leapfrog the need for any hardware.
We’ve become habitually trained to think that card payments are easy - but they are not. It’s one thing to find your wallet; quite another to input your card number, without error, at the first go. Strong Customer Authentication has only created more layers in term of the user experience, “Paying by card is just painful. You only need to look at retailer pain points, to understand why. There are additional efficiency, suitability, and technical issues beyond just transaction cost, which make this a broken process,” said Rezaiezadeh. Payment failures are more a result of card failure (e.g., expired card) than they are about insufficient funds. This has a huge impact on the customer experience, churn rates, and customer recovery costs. This is big enough motivation for merchants to try something else.
Adoption of viable alternatives to card payment is not just about whether merchants or consumers want to do it. The partner ecosystem side is just as crucial, as most businesses rely on other platforms. “Building an ecosystem to support seamless finance, with exposed APIs on a broader range of services, is vital,” said Janes. FinTech’s need to work with contingent platforms to encourage integration and development of their products and services over time. “We need to provide a plug-in rather than trying to force-fit ourselves,” said Xu.
It is clear, given the regulatory backdrop, that payments will become ever more embedded in our everyday lives. Experiences like Amazon Fresh point to a future where payments will be an unconscious part of our lives. Change is not happening as fast as some critics might like, but we are starting to see stronger commitment from the CMA and Payments Systems Regulator: which will give consumers, merchants, and businesses the much-needed confidence to fully embrace open banking. According to Janes, “the next frontier for open banking, will be how it will apply to much larger transactions and its wider adoption for B2B and corporate payments. Wouldn’t it be great to be able to buy your house or place a large order with a manufacturer with that same ease and security?”
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Shieldpay is a market leader in providing digital payment solutions across the legal, financial and professional services industries. Get in touch to find out more.