February 12th 2019
Pushing Payments Into the Next Chapter
In the merchant-consumer interaction, pull payments dominate. For merchants, this means that accepting non-cash payments from customers must involve card schemes and acquirers: as well as their respective fees. Push payments, becoming increasingly relevant due to PSD2, may offer an opportunity to bypass schemes and acquirers altogether.
What is a push payment?
In contrast to the familiar pull payments that are initiated by the seller, push payments are a credit transfer from one bank account to another, initiated by the buyer. This can be used in business-to-business, peer-to-peer, and business-consumer transactions: the latter presenting a huge opportunity for merchants to see lower payment processing fees.
What do push payments look like to consumers?
For online transactions, the user experience will be very similar to pull payments. Instead of storing card details with merchants such as Amazon, consumers just need to give permission for their bank and the merchant to swap data and facilitate the push payment.
For in-store transactions, consumers may need to scan a QR code at the checkout through their preferred PISP mobile app in order to initiate the payment, or enter a merchant-specific code. The money will come directly and instantly from the consumer’s bank account, allowing for easier control of their spending.
What do push payments look like to merchants?
Merchants will receive funds directly from customers into their merchant bank account, much faster than they would from a push payment – the speed depending on the payment rails used for the transaction. How exactly the process works depends on the extent to which the merchant is willing to ‘become their own acquirer’.
1 | If the merchant successfully applies to become a PISP, then they will have to communicate with customers’ banks through APIs in order to process the payment – cutting out acquirers, schemes and any other third parties in the process.
2 | Alternatively, merchants can use a dedicated PISP to handle the transaction, which will likely involve a small fee but comes with the bonus of not needing an IT-intensive in-house solution. As a market-leading PISP has yet to emerge, we currently do not have visibility over exactly what a typical PISP fee will be.
What about merchant reconciliation?
Push payment transactions sent via the card networks will contain automatic remittance details, but it remains to be seen how push payments sent via TPPs will address this information issue. Reconciliation may become more difficult if merchants are forced to match payments on less information.
What about fraud?
Push payments offer increased security for consumers as they do not require card numbers or BINs to be kept on file by the merchant. Additionally, the risks of so-called ‘friendly fraud’ from chargebacks is reduced when customers themselves initiate the payment. There is, however, a lack of clarity of responsibility between PISPs and customers’ banks in the event of a loss, and so there remains a question over ultimate liability. Additionally, rules regarding chargeback disputes and other processes will need to be redefined for PISPs in order to ensure a smooth experience.
What will the likely reaction be from:
Issuers may look to:
1 | Improve their product offering: improving rewards schemes for consumers may incentivise them to use cards over push payments, steering them away from the lower revenue payment types. Issuers receive interchange income from card transactions, but this would be lost for all transactions made using a bank transfer.
2 | Gain a foothold in the PISP market themselves: 76% of consumers would choose traditional banks over TPPs to handle their push payments, suggesting that issuers are in pole position to be PISPs.
Importantly, issuers – by law – cannot charge merchants differently for payments initiated through PISPs than they would for equivalent payments initiated by consumers themselves.
Similarly, Visa and Mastercard may decide to:
1 | Improve their product offering: this could be for either merchants or consumers, but with the ultimate goal of incentivising conventional card spending.
2 | Gain a foothold in the PISP market themselves: Visa Direct and Mastercard Send already provide services for card-based push payments in B2B, B2C and P2P. Mastercard’s ‘Pay by Bank App’ is C2B, but currently only through the Pingit app issued by Barclays and only online.
Visa Direct and Mastercard Send show that both schemes are willing and able to enter the push payments market, while the ‘Pay by Bank App’ solution from Mastercard shows a clear desire to enter the retail space. Originally developed by the Zapp unit of Vocalink back in 2013, Worldpay will offer the Pay by Bank solution to merchants from early 2019 as part of a partnership with Mastercard. The leap from online to F2F is likely to be the next step for Mastercard, however it remains to be seen how fees will be structured for this payment type.
There is also a third option for the schemes: make scheme fees more competitive.
This move would likely have the greatest positive impact on merchants, as competition from PISPs and bank-to-bank transfers force scheme fees down and result in lower overall costs for merchants. The schemes may reject this option in favour of entering the PISP market themselves and maintain margins in traditional card payments, however – at this moment in time – the PISP market looks to be much more conducive to competition than the market for cards.
Ultimately, push payments have the potential to revolutionise how merchants accept payments from their customers.
However, the extent to which consumers will change their payment habits is a big unknown and relies fundamentally on the quality of checkout experience offered by PISPs. Regardless, due to the likely lower fees and other benefits associated with push payments, this should be an area merchants consider when planning for the future of their POS.