From as far back as the ’50s, when consumer payment cards were first conceived as an alternative to hard currency, there’s been a relentless march towards spending on plastic. Whilst initial adoption wasn’t exactly revolutionary (card spend during the ‘70s was under 15% of all transactions in the US), the tide of consumer mentality slowly began to turn. Driven by consumerism and international travel, by the ‘80s it was clear plastic well on its way to becoming the new norm. The trend accelerated through the ‘90s, and ’00s, powered by the development of the internet. By the turn of the century projecting the trend forward the media were actively talking about the impending death of cash.
I for one stopped bringing out my ‘just in case’ cash by 2005 and solely relied on card. By 2010 cashless was overwhelmingly the preferred method of consumer purchase. Innovation occurred only superficially with prepaid cards and virtual cards increasing in popularity. And this bonanza of polymer payments created Titans of the money transmission world. To be in the middle of it all, pulling the strings behind the scenes, controlling multinational grade value exchange every day, was the place to be. The epicentre of payments was occupied by two titans of payments – Visa and Mastercard.
Visa and Mastercard’s, dominance and ubiquity in the payment space is a modern marvel. For over 60 years their presence and influence has gone from strength to strength, steadily gobbling up market share as they expanded.
But if history teaches us anything, it’s that nothing is permanent. Empires rise and fall; success is never guaranteed. Adapt or die. It’s as true for biological lifeforms as it is for ethereal corporate entities. The relentless march of technology is now enabling the development of competing payment technologies, not only potentially faster and significantly cheaper but for the first time in 60 years, viable alternatives to card.
When we look at the evolution of the payments industry in the next 10 years, the question arises: will open banking or other potential alternatives to card herald the beginning of the end for the incumbent schemes? Or is a trusted third party at the centre of a payment scheme a requirement for it to flourish.
Development of Open Banking standards is creating a brand new set payment rails and creating a mini gold rush in the world of payments. We are already seeing the first new trains in the likes of Plaid and Truelayer. Though who will be the boxcars I don’t yet know.
The first passengers onboard as always will be the individuals. But not far behind, waiting their turn quietly, is the Retail Industry or what I tend to think of as the Adoption Mafia. Very little in payments succeeds, if these guys don’t like it. For years these guys have really only had Visa or Mastercard to choose from. Any business that begrudgingly slaps a Visa or Mastercard acceptance sign on the shop window (or increasingly on the website footer) has long been looking for a new way of accepting payments without compromising conversion.
With high hopes and bated breath then, the world of retail waits to see where these new tracks will lead.
The use cases of open banking are plenty, if not always so well-illustrated to the public. Why, for example, wouldn’t I want to pay for goods in the same way that I pay my friends.
The one who always (earnestly) promises to pay me back next week (but somehow never does). Or the guy who got me lunch when I left my wallet (phone) in the office. It’s quick, it’s easy and the aforementioned friend gets the funds practically instantly.
Let me set another scene for you to demonstrate my (or in reality the Merchant’s) case.
Most Friday nights I order the “Joey Special: (that’s a Friends reference for those of you who got it) From a popular Pizza Chain. I won’t mention the name, although as I’m a sucker for quizzes I will give you a clue. It rhymes with Tominos.
Anyway, where was I. Oh yes… I’m ordering my Friday Night Takeaway, I reach the checkout page and I’m met with a plethora of payment options ranging from Applepay to Visa Direct, cash and of course the traditional and ever-present card. Over 80% of us today choose some version of a card transaction. Deal done! All good so far. But what follows is where things can become (from the retailers perspective), a little less savoury.
So, deal done. Thanks Visa/Mastercard! What does Tominos do now? Well, presumably they will start creating the product immediately. They will, knead, stretch, baste, top and bake that thing – often within 10 minutes. Then box, stack, pack and deliver it in another 10. A marvel of modern efficiency you might say. Everyone’s happy, right? Well, no, not always.
This is where the train sometimes derails.
A day or three later the pizza restaurant will receive my hard-earned money, minus a pretty penny (or a few hundred) for the pleasure of accepting the transaction. In that time lag, they live in a pretty powerless black hole.
Why? Well, it’s simple consumer protection. Let’s take a look. The consumer may have not been happy with the product. The consumer may have gotten ill the next day and decided (rightly or wrongly) to blame it on the pizza. The consumer may have had their card or details stolen, and in actual fact, it wasn’t them who ate the deliciousness. Maybe the customer didn’t calculate their monthly budget properly and just simply had to make an emergency halt on the transaction.
Whatever it was, Tominos have to sit still and cross their fingers simply praying that none of the above happen. Because if it does, they have just done all that work for free. Worse, they’ve actually lost money. Ignoring the obvious overheads of running a business just processing the payment has a cost itself. Not to mention the fact disputing or accepting the refund request can be the most expensive part of the process. Try punching those into your Unit Economics model!
Consider (again for the merchant’s sake) the same experience but with the payment via an open banking solution. Instead of choosing to pay by card, I decide to “Pay by (insert business brand that succeeds in the OpenBanking race) Bank Transfer”. With the click of a button, your bank app opens, you verify it with your thumb or face, tick approve on the payment and then arrive back in your Tominos app. Well, the benefit for the customer is broadly the same as if paying by card, simple and convenient. But the benefit for the merchant is significant, no card scheme fees to pay and more importantly no chargebacks to worry about. Bank transfers are final.
Whilst it might seem odd to do a bank transfer for a pizza, soon it will become the norm. Think about it, how do you pay back the friend that managed to get Glastonbury tickets for you, or lend your sister £50. Most likely if you’re in the UK – you do a bank transfer. Why then would it be unusual to pay for your pizza, or an Amazon order, or any myriad of things you’d use your card for on a weekly basis. The answer is quite a simple one – convenience. And if there is one thing every purveyor of any goods (ever) covets above all else, it’s keeping things convenient.
Whether it’s a thronging Bazaar in Ancient Mesopotamia, a dusty and stiflingly hot Mercado in the Aztec city of Tenochtitlan, the posh Farmer’s market at the nearby Hackney, or from the comfort of your own home on the Amazon.com omnimarket, once the buyer has signalled an intent to buy then convenience is king. If you lose that sale because of convenience, then all the rest of your hard work has been for nought. In capitalism, there are few more bitter pills to swallow.
Visa and Mastercard, as trusted third parties in the card space and providers of the ultimate financial plumbing, allow companies to focus on making it convenient to spend on a card.
For OpenBanking, the same global intermediary does not exist……yet.
There then is the paradox for the Merchant. As bad as the burn of card scheme flaws can be, the burns are in most cases superficial leaving at worst a scar. On the contrary, the scar is also a mark of success. You can’t get the scar if you didn’t make the sale in the first place.
There can be no fraud, no refund or chargeback for the sale that never was. So for all its failings, only a fool would reject something that actually enables the sale.
OpenBanking provides both threat and opportunity to Visa and Mastercard, pioneers and oligarchs of the payments industry. A viable new payment technology is on the horizon.
Adoption might not be as rapid as its most ardent proponents hope, but it is coming. At its core, it’s a fantastic alternative to Visa and MC’s more established payment methods, but currently has flaws that inhibit its mass adoption. And this leaves the Duopoly a tough but ultimately simple decision to make.
To Buy or to Die?
To pursue continued improvement in card technology now seems a game of diminishing returns. A card, at its most basic, is an identification card allowing access to your bank account. It tells the recipient of funds who the customer is, that they are allowed to take money from this customer and from where they may take it. It tells the steward of the funds (the bank) that the customer has permitted this transaction and that they may release the funds.
This technology has all now been digitised, all internalised. The banks already have the technology to release funds to any account in the world. They now have the ability in real-time to authenticate users and permit one time and multi-time third party access. In short, they are able to insource all of the technology that they have previously outsourced to the schemes.
Why then would Visa and Mastercard continue in parallel doing the same thing? Technology it appears, has caught up with them.
You can see from the acquisition patterns of the last few years that Visa and Mastercard themselves identified it. 5 Billion+ for a Visa partnership with Plaid to gain access to account data, payment initiation and user bank account insights.
The acquisition of the global bank transfer network Earthport (from right under Mastercard’s nose) highlights this push into the bank transfer space.
Mastercard haven’t been idle either. Their purchase of Scandinavian payment juggernaut NETS’ Account to Account payment system and Otlio, the South African digital payments and authentication solution shows they are equally interested in the digital bank transfer space.
It’s clear and obvious then that the intention is to Buy. And with balance sheets that most organisations would …die for… it makes sense to open the cheque book.
Earlier I mentioned OpenBanking has some drawbacks. The drawbacks have never been about the technology though. The technology has been sound for years – it’s ultimately a bank transfer.
The problem has always been threefold:
1. Security.
2. Bank Reticence.
3. Convenience.
Security because the Banks’ principal responsibility is to not lose it’s customers’ money. if they can’t assure us of that then it’s back to the days of cash under the mattress. But whilst security will never be 100% assured, it never has. Security has always been a game of percentages. Take chargeback ratios of schemes. Visa and Mastercard don’t say to the tenants of their respective schemes, “you cannot allow fraud or have any chargebacks”. Rather they instruct the stewards of their schemes to aim towards “acceptable” levels of fraud/chargebacks on a monthly basis – say below 1%. Banks similarly adopt a percentage approach where they aim to keep wire fraud to a minimum. Both methods ultimately have to accept that eliminating the risk entirely is not feasible. To that end, the increased regulatory focus of wire fraud in the last 10 years has helped to create an infrastructure in parallel to the card schemes that offers equivalent security for third party bank transfer access. This, in turn, has decreased security risks and in turn removed much of the prevailing bank reticence for engaging with the OpenBanking vanguard.
Bank Reticence because well, nobody likes change. From the banks’ perspectives, this is a whole load of cost and risk, for essentially very little upside. The less they control the movement of customer funds the less security they can offer. (And not to mention the less money they make). As we discussed above, the leaps forward in technology has dramatically lowered the exposure (and accountability) to the risk of TPP and therefore kicks out from under the banks a leg of resistance. The other leg (of resistance) – commercial protectionism – has been hopping along for much longer though. The Banks have every right to ensure they look after themselves. After all, nobody wants a bank to prioritise connectivity and access overcapacity to be a solvent entity. However as the market hype builds around OpenBanking, Banks have begun to see this as an opportunity to create a little bit of a PR spin. By aligning themselves with the leaders in the space, they are undoubtedly looking to attract the businesses of the future. Digital native 20 somethings will have no need for branches or probably even online portals. The business leaders of the future want it on their phone and wherever whenever. The fact that banks are now aligning themselves with Fintechs in the OpenBanking space just underlines how important it’s become to banks to be seen to embrace this new change.
Convenience is the final of the three obstacles. Right now OpenBanking as a checkout alternative requires the user to authorise a transaction (just like every other push-payment method) on each occasion that you transact. This makes sense as it allows the vendor and the buyer to validate each transaction in real-time. The problem however is that the Merchant as mentioned above – values convenience above all else. A bird in the bush after all – is worth nothing.
And whilst the incumbents of schemes might have their drawbacks, they ultimately result in sales conversions. One of the key reasons for this is that they allow the merchant to control the checkout experience. Moreover, they allow the experience to happen within the walls (or pixels) of the Merchant’s own domain. Tominos does not want its customers running to the ATM and passing a fish and chip shop just to get money out for the pizza. Equally, they don’t want customers logging into another app just as they enter the checkout. It’s a conversion killer.
OpenBanking as it presently stands would push the user outside of the app and force them to log into a secondary app for approval before a final return to the original app checkout page for confirmation. There is no upside convenience or conversion here. The very best case scenario here would be a 0% drop in conversion rate. And that ladies and gentlemen is about the least attractive sales pitch a technology can have.
These reasons are still serious barriers to entry and hurdles for adoption for OpenBanking. And all of which are exactly what VISA and Mastercard were founded for in the first place. The fact that technology has moved on doesn’t change the core of human desire. We want, fast, secure and convenient solutions. And Visa/MC can still have a place in this new world as an arbiter and participator in this new technology.
They are an existing trusted third party, helping secure and moderate the users. They have great relationships with the banks already and they can know how to build a payment scheme that is convenient.
OpenBanking is a fantastic initiative that will open up new, lower cost, lower fraud, hyper-efficient transaction initiation and transaction recording. But it’s still in its infancy as an applied technology. It still hasn’t been battle-hardened from the millions of users and decades of evolution the schemes have survived through.
Visa and Mastercard are right to be cautious, but not to be worried. They should see a huge opportunity to expand their reach. They have the bank balances to sit back, open a bag of popcorn, and watch patiently to see which contestant wins this Payment Royal Rumble. And likely as not, the winner of the Battle Royale will become the latest in a long line of acquisitions in the omnipresent Duopoly. And, I’d argue, only then will open banking be in a position to rival cards for convenience.
And until then – like almost everyone else, I’ll continue to use ApplePay.
