However, the UK market is highly card-penetrated, with credit and debit cards representing 74% of POS transaction volume.3 It is also well-serviced by burgeoning alternative payment methods (APMs) such as Digital Wallets, Buy Now Pay Later, and PayPal, representing a challenge for PIS to differentiate, and appeal to both consumers and retailers.4 This begs the question: can PIS become a legitimate payment method in the UK?
We believe it can, but for that to happen, it must provide distinct value to consumers, retailers, and financial institutions alike by increasing consumer protection, merchant awareness, and customer incentivisation whilst, critically, being commercially viable for banks.
1. Consumer protection
In the UK, credit and debit cards are covered by government legislation, under Section 75 of the Consumer Credit Act 1974. This lets an individual raise a claim against their issuing bank or lender for breach of contract or misrepresentation (e.g., fraud) by the supplier of goods and services in order to get their money back. There is an established liability framework in place along with a claims and arbitration process.
Currently, PIS does not possess this “comfort factor” and extra layer of trust. This is a clear barrier to consumer adoption and something providers must look to instil. PSR data indicates that consumers view security as a more important factor than ease of use or speed for all but low value (under £10) transactions.5 In 2023, the Joint Regulatory Oversight Committee (JROC) called for a Dispute Resolution Implementation Group chaired by Pay.UK to develop and implement a similar mechanism – this represents progress.6 Meanwhile, Nationwide’s Director of eCommerce highlighted the need to put proper frameworks in place now: “we need to collectively focus on fraud first – or we could regret it”.7 Safeguarding customers is required for PIS to flourish in the UK.
2. Awareness
Merchants are currently the main beneficiaries of Open Banking payments as it enables cheaper transactions by offering lower interchange fees than cards. HMRC currently provides the best use case for this. By leveraging this technology, not only did HMRC see its Open Banking transaction volume grow from £2.5 billion to £10.5 billion within a year, but it also saved an estimated £500,000 in interchange fees within six months of implementing it.8 This indicates the magnitude of savings merchants could generate by simply providing PIS as an additional payment option, improving profits and cash flow.
This issue is that many merchants remain unaware of what Open Banking is, never mind the benefits it could confer to their business.9 The omnipresence of credit/debit cards and of APMs would also trigger greater reluctance to change from merchants in adopting an additional one. Better communication and campaigning from regulators and enthusiasts is necessary to accelerate adoption. We believe the industry can learn from the impact of the contactless payments symbol when it was first introduced, as its use proved pivotal in driving widespread adoption.
3. Incentivisation
Credit cards offer consumers perks in the form of cashback, points, or air miles, earned proportionally as they spend. For PIS providers to get sticky consumers to shift payment habits, they will have to offer similarly, if not more, attractive incentives.
In the UK, NatWest’s PIS “Payit” has encouraged merchants to use incentive schemes with guaranteed vouchers of up to £50 to attract additional customers.10 If we look to other geographies, Capitec the largest digital bank in South Africa drove PIS uptake by offering consumers the chance to win one of thirty 2,000 ZAR cashback prizes if they checked out using Capitec Pay. Merchants were also incentivised to win one of two 30,000 ZAR cash prizes.11 This is early evidence that PIS providers are starting to pull the right levers to incentivise customers.
Furthermore, digital incentives in the form of e-gift cards redeemed online may be more appealing for eCommerce customers. Tillio are already partnering with PIS providers like Banked to pilot this. The collaboration is aimed at enhancing checkout conversion rates for merchants, driving adoption of Pay by Bank and creating a win-win.12
4. Commercial viability for banks
Current regulations, based on the PSD2 framework, require banks to open up API access to TPPs to enable services such as Open Banking payments. While this freemium model poses certain limitations on how banks can monetise these services directly, there are still avenues within the framework that banks and PIS providers can explore to create value and maintain the commercial viability of PIS.13
Fee models for premium access: banks and lenders can offer premium tiers of API where the bank is permitted to charge a fee to the TPP for additional access, technical functionality, higher service levels and an enhanced user experience.14 For instance, other financial players such as Stripe15 and Square16 offer tiered pricing models for different levels of service and processing capabilities, demonstrating that businesses are willing to pay for enhanced functionality and higher service levels. Banks should consider developing similar models for API access that meet the needs of high-volume merchants and PIS providers.
Value-add services: several banks and financial institutions have begun leveraging cutting-edge technologies such as AI and ML to offer enhanced value-add services (e.g., fraud detection and security services). For example, Mastercard have developed AI-powered security solutions (e.g., Decision Intelligence)17 that analyse transaction data in real-time to enable institutional customers to better assess suspicious transactions on their network, illustrating how financial institutions and PIS providers can create and leverage services as a premium offering.
In payments, there is an adage that innovation moves at light speed but adoption at a glacial pace – contactless being case and point. In this respect, six years of existence is not nearly enough time to write the book on Open Banking payments, but it is enough time to write the first chapter – one characterised by regulatory zeal, but sub-par customer appeal. There is reason to believe this will turn around in the years to come, but a concerted effort must be made by players across the ecosystem to enhance consumer protection, merchant awareness, customer incentivisation and commercial viability for banks. There is an imperative for banks to embrace further collaboration with TPPs, embedding this within their operating model. Payment Initiation Service Providers (PISPs) and fintechs must also inspire greater user confidence. The time to act is now, before the window of opportunity closes.
References
[1] Simon Albrighton and Peter Harmston, “Open Banking at the point of sale – 3 factors to consider”, KPMG UK Blog, 22 February 2023, https://kpmg.com/uk/en/blogs/home/posts/2023/02/open-banking-at-point-of-sale.html
[2] Open Banking Limited - Forleon, “The Open Banking Impact Report: Intermediary Outcomes (Adoption)”, October 2023, Intermediate outcomes (adoption) - The open banking Impact Report 2023 (October) (foleon.com)
[3] Worldpay, “The Global Payments Report”, 9th edition, 2024, https://worldpay.globalpaymentsreport.com/en
[4] Ibidem.
[5] First Partners, “Why open banking payments need chargebacks”, 5th October 2021, https://www.firstpartner.net/blog/why-open-banking-payments-need-chargebacks/
[6] Open Banking Expo, “JROC responds to the VRP Working Group’s blueprint”, 19th December 2023, JROC responds to the VRP Working Group’s blueprint | Open Banking Expo
[7] Mastercard, “The Future of Open Banking Payments”, MoneyLive, 2023, Mastercard Open banking Moneylive ebook 2023.pdf (aiia.eu)
[8] Simon Albrighton and Peter Harmston, “Open Banking at the point of sale – 3 factors to consider”, KPMG UK Blog, 22 February 2023, https://kpmg.com/uk/en/blogs/home/posts/2023/02/open-banking-at-point-of-sale.html
[9] NTT Data, “Five years on and 60% of consumers still don’t understand what Open Banking is”, 26 January 2023, Five years on and 60% of consumers still don’t understand what Open Banking is | NTT DATA
[10] Williams, “Introducing Payit™, https://www.tradeonlyplumbing.co.uk/payit
[11] BusinessTech, “Payfast and Capitec Pay drive open banking”, 14 December 2023, https://businesstech.co.za/news/industry-news/738623/payfast-and-capitec-pay-drive-open-banking/
[12] Tillo, “Driving Open Banking Adoption Through Tailored Rewards and Incentives”, 26 June 2023, https://www.tillo.io/blog/driving-open-banking-adoption-through-tailored-rewards-and-incentives
[13] The Financial Conduct Authority, “FCA finalises revised Payment Services Directive (PSD2) requirements”, 19 September 2017, FCA finalises revised Payment Services Directive (PSD2) requirements | FCA
[14] Ulster Bank, “The (unmet) potential of Open Banking: Towards a system that provides incentives for all participants”, 4 July 2023, Open_Banking_Report_Final.pdf (ulsterbank.co.uk)
[15] Stripe, Recurring pricing models | Stripe Documentation
[16] Square, Square Processing Fees, Plans and Software Pricing (squareup.com)
[17] Ryan Browne, “Mastercard jumps into generative AI race with model it says can boost fraud detection by up to 300%”, CNBC, 1 February 2024, Mastercard launches GPT-like AI model to help banks detect fraud (cnbc.com)
