Here in the UK the Treasury has been undertaking a Payments Landscape Review that sets out some high level aims for the sector. One of these is to unlock open banking-enabled payments safely and securely to to allow consumers to pay for goods and services both in store and online directly from accounts. They expect that this will provide an alternative to credit and debit cards, creating competition for the existing infrastructure and players to give consumers and businesses more choice between payment mechanisms. It will also (and personally I am more interested in this agenda) create new opportunities for fintechs to build a new generation of payment products (ie, rather than attempting to emulate 70 year-old card products that combine authentication, authorisation, credit, convenience, cash replacement and so on in a single bundle).
I’m not smart enough to know exactly what these products will be, but I can see the retailers and others are looking to develop and evolve their apps and wallet products and that account-based payments can find a home with them. Rita Liu, formerly of Alipay and now of Mode (and someone with a deep understand of payment innovation), links open banking and QR codes by saying that “QR codes can revolutionise the front end as they have in the East, while Open Banking can revolutionise the back end”. This is a characteristically accurate analysis of the opportunities for bringing added value to merchants. As she highlights, the direct flow of information between consumers and merchants creates a simplified, cost-effective value chain, and it can transform merchants’ relationships with their customers by leveraging data to offer a truly personalised experience. This is precisely what Australia’s domestic debit network Eftpos hope to achieve with their launch of the eQR service. It has signed up Commonwealth Bank, National Australia Bank, Azupay, Beem It and Merchant Warrior to support the rollout of the new platform. It also has the biggest retailers on board, Coles and Woolworths, As with other retailers, one of the attractions for such chains is that their app can combine payments, loyalty and spend tracking in one and a simple quick QR scan is all that is needed to get everything done.
The A2A back end for these new propositions is coming together. As McKinsey point out, the introduction of applications capitalizing on instant payments infrastructure in recent years (such as PhonePe and GooglePay in India, PayNow in Singapore) has driven growth and sharpened competition between national and regional solutions and the global schemes. A good illustration is the building of the European Payments Initiative (EPI) that exploit the Single Euro Payments Area (SEPA) Instant Credit Transfer (SCT Inst) scheme for point of sale as well as online usage.
The US is moving forward as well. Plaid is making a move into this space with a set of strong payment partners in North America and Europe — including Square, Dwolla and Currencycloud (recently acquired by Visa) — that will integrate Plaid into their processing systems for payments direct from bank accounts. This means we will soon see “pay from your bank account” options being presented by merchants, billers and wallets. Those organisations would present this alongside conventional payment card options, option alongside other payment methods, such as credit or debit cards. I can imagine, however, that many organisations will start tender steering toward this lower cost, more secure option: It won’t be long before merchants are offering double points or whatever to encourage consumers to send money directly from their bank account to the merchant’s bank account.
Not Good Enough
I think the emergence of direct from accounts alternatives to card is an important evolution in retail payments. Driving down the cost of payments and reducing the margins available across the value chain is a good thing. Here’s one reason why: credit cards are unfair. Joanna Stavins, a senior economist and policy adviser at the Federal Reserve Bank of Boston is the co-author of a recent paper from that looked at the cost of credit card rewards and, as she notes, central to the dynamics of their use is that consumers who use credit cards “tend to be cross-subsidized by consumers who use cash or debit cards”.
This is true in the UK as well The government banned credit and debit card surcharges back in 2018, which was great news for me because now I can use my premium cashback rewards card everywhere. Until January 2018, when I had used premium card to book a flight, I had to pay a credit card surcharge. I didn’t mind paying the surcharge because I want the protections that the use of credit cards give me as a consumer and also because I wanted the frequent flier points I get for using this card. Now I get all this stuff for free, and less well off people who can’t afford the annual fee for the premium card are subsidising my free flights to all points of the compass. Thank you, Mrs. May!
Open banking payments are about to get another boost here because of what is known as Variable Recurring Payments (VRP). VRPs allow customers to safely connect authorised third parties to their bank account so that they can make payments on the customer’s behalf (within agreed parameters). Mike Kelly, who was the product lead for VRP, says that they have “huge potential to revolutionise finance” and he is absolutely correct. Right now, if I want to allow a supermarket to push money from account to their account (via their wallet app, for example) then I have to authorise each transaction individually. Doing this through some sort of request-to-payment mechanism is a very good solution in many circumstances (eg, a monthly subscription payment to a gym that keeps trying to charge you even though you cancelled months ago) but it’s not a good solution when you are standing at the checkout in the same supermarket that you have shopped at twice a week for the last decade.
With major players such as Plaid pushing forward the ecosystem, it won’t be long before the decade-old dreams of MCX (the failed multi-retailer attempt to oust the networks a few years ago) are a a reality and your supermarket QR-driven wallet will first give you the option of paying from your bank instead of via a credit of debit and then pretty quickly moves on to put this top of the list and offer you double points for paying that way. People who say that the current payment systems work just fine are just plain wrong, but it seems to me that open banking rather than cryptocurrency will provide an opportunity to make them better.
Snippings 