Why are Open Banking payments an ideal replacement for cards?
PSD2’s payments infrastructure & the advantages of account-to-account (A2A) transactions
Open Banking remakes payments in favour of merchants and their customers. The EU’s PSD2 legislation came into effect in 2018, designed to boost competition in financial services and modernise payments infrastructure. This involves a new kind of payments company, able to provide A2A (account-to-account) transactions throughout Europe.
Payment Information Service Providers (PISPs) access consumer and business bank accounts directly via the banks’ APIs. This lets them move money directly between accounts, without any other intermediary.
Compare this with card payments. Card transactions pass through a chain of several companies. This typically includes a payments gateway, acquirer and processor, as well as a card scheme and the customer’s bank. Card transactions take several days to settle and incur fees from each intermediary, eating into the merchant’s margins.
A2A payments via Open Banking can have significantly lower per-transaction costs than card payments; ours are below 1%. This is because A2A payments completely bypass card infrastructure, and the costs associated with this. Fees for card and wallet-based payments typically reach 3% of a transaction.
This also means less friction for the customer. Here’s an example of how easy an Open Banking payment’s user experience can be. Using mobile biometrics to confirm the payment also reduces fraud risk.
Until now, account-to-account payments had only been a viable alternative to cards in some countries, like the Netherlands. The Netherlands’ iDEAL has been the leading payment method there for several years. In the UK, Vocalink attempted their own A2A payment method with Zapp, but struggled to get the banks to cooperate. It’s taken the clout of EU regulations to make account-to-account payments at regional level a possibility.
And at the time of writing (March 2020) Citizen is the only working Open Banking payments solution with a complete end-customer experience.