PSD2: The European Payments Revolution? Part 4b: Open Banking Adoption
The Second Payment Services Directive (PSD2) introduced the concept of Open Banking to Europe. As discussed in our last blog post, this introduced new business models with potential benefits for consumers and merchants.
This blog post, our sixth post in our PSD2 series, continues our discussion of Open Banking with a focus on analysing adoption by consumers and merchants.
Consumer Trust and The Hurdle of Adoption
Early on during the implementation of PSD2 and Open Banking, there were concerns around the appetite for third-party providers to venture into the PISP business. This was largely due to the consumer trust hurdle which they would have to overcome. On the surface, it seemed consumers would be relatively happy to share access to accounts for the sole purpose of consolidating information into a simple dashboard. However, allowing a third party to initiate payments would, it seemed, be a completely different story.
Early surveys did suggest consumers felt Open Banking meant a greater likelihood of fraud. A study conducted by PwC in 2018 suggested 64% of retail banking customers and 63% of SMEs agreed that Open Banking would mean a greater risk of fraud (source: The future of open banking is open: How to seize the Open Banking opportunity, PwC). Although the possibility of fraud was not just restricted to the PISP business model, consumers would arguably be more averse to fraud in the context of a payment transaction as opposed to financial information. However, fears surrounding the appeal of a PISP business model no longer seem appropriate as recent data on third-party provider composition across Europe suggests appetite for both AISP and PISP business models. The table below summarises the number of TPPs registered to provide either a PISP solution, an AISP solution or both as of March 2021.
Table 1: Registered AIS and PIS Providers by Country (Open Banking Europe)
While there does appear to be appetite from TPPs, the question still remains as to whether consumers would trust a PISP payment method. Although, the number of retailers utilising such a solution (through TPPs) is still relatively low, anecdotal evidence from open banking solution providers does seem to suggest robust consumer adoption of these payment methods once they are offered by retailers. Truelayer, for example, reports that open banking payments reach 30% share of checkout within a few months of launch for their clients.
Merchant Adoption of Open Banking
THE CHICKEN AND EGG PROBLEM: WHO MOVES FIRST?
Given that retailers stand to benefit more from leveraging PISP payments than consumers (although not necessarily at the expense of consumers), merchants will likely need to move first in introducing PISP payment methods to their checkout and drive the consumer adoption of these payment methods. This is because the value a consumer derives from adopting a payment method or instrument depends on the extent to which that payment method is widely accepted. Similarly, a retailer will likely only want to accept a payment method that is popular with consumers. In the absence of any first mover, any new payment method would struggle to take off. However, given that there are significant benefits to be gained for merchants, merchants will likely move first and promote the adoption of PISP payments.
BECOMING A PISP VS. LEVERAGING SOLUTION PROVIDERS
The question of how best to leverage Open Banking from a retailer perspective is also of interest. Merchants could technically become PISPs in their own right and therefore remove the TPP and the fee it would levy to process a given transaction from the equation. However, the cost and complexity involved in becoming a PISP must be considered in relation to any cost reduction benefit the merchant can gain from bypassing a TPP. Putting aside the compliance costs involved in becoming a PISP, the cost and complexity of building out a solution that can connect to thousands of banks across Europe with varying API standards may pale any PISP fees that are avoided for even the largest merchants. While the merchant may be able to utilise the services of data aggregators to simplify this process, the data aggregator will likely levy a fee which will likely be higher than that levied on typical PISPs leveraging volume from multiple merchants.
Although there are potential benefits for merchants, Open Banking is still a relatively new concept in payments acceptance. Therefore, first movers have a role to play in shaping the way these payment methods are offered to customers. Over time, as the PISP solutions offered by suppliers become more refined, we expect the acceptance of PISP payment methods to achieve mainstream adoption.
Indeed, there has been much growth in the number of open banking payments made in the UK. According to the OBIE, 300,000 open banking payments had been processed in 2019. In 2020, this number increased to 3.2 million and in February 2021 alone, 1 million open banking payments had been processed (source).
Part of this increase could be attributed to the pandemic with the growth in the usage of online and mobile payment channels. This will have likely forced many brick and mortar retailers to build the relevant infrastructure required for Open Banking payments to be viable. Furthermore, a lot of retailers will have considered and invested in new and innovative contact-free methods of accepting payments in-store which are complimentary to new Open Banking solutions such as QR code payments at the Point of Sale. Open Banking, therefore, will have become much more relevant for many more retailers.
While consumer adoption was previously seen as a big hurdle preventing widespread usage of open Banking-based payment methods, anecdotal evidence from early adopters does seem to suggest robust appetite from consumers. Furthermore, the appetite from TPPs to venture into the PISP business seems to suggest a belief within the wider ecosystem that these payment methods will take off. There is a widespread belief, therefore, that Open Banking is here to stay and will shape the future of payments with consumers able to pay seamlessly and merchants able to accept payments at lower costs with less friction. As such, it is likely that merchants will need to move first in adopting these payment methods, given the benefits they can offer. In the UK, the number of open Banking payments has been increasing rapidly and this is likely to continue as merchants have accelerated investment in digital channels such as online and mobile payments which are well-suited to Open Banking use cases. Given that Open Banking-based payment methods are expected to play a significant role in the way consumers pay in the future, retailers must consider these payment methods as part of their future payments roadmaps.