How to Realize the Potential of Open Banking Payments

Reaching the tipping point

Executive summary

Over the last five years, the payments landscape has evolved at lightning pace. The speed and quality of innovation happening within the UK is unrivalled, and subsequently, adoption of new payment methods such as Open Banking payments is making encouraging progress.

Yet, there is untapped potential. Open Banking payments are quick, seamless and completely secure. They offer both consumers and merchants a whole host of benefits which are no doubt recognised and embraced by the 7 million active users in the UK; but this is less than 10% of our population.

How can organisations, influencers, policy makers and stakeholders within the payments industry collaborate to connect more people to the benefits of Open Banking?

Pay with Bank transfer (PwBt) powered by American Express has teamed up with Nuvei, a preferred partner, to explore what could be holding back widespread adoption.

We’ve delved into what it takes to capture the trust and interest of consumers via robust research, and considered what could engage and incentivise merchants to add Open Banking Payments to their stack. We’ve also included some practical guidance for merchants on the implementation process, and provided real world use cases to illustrate the potential impact in terms of customer satisfaction, fraud reduction, and reduced costs.

Knowledge is power. We want to arm the reader with actionable insights, giving them confidence to explore the possibilities. Both consumers and merchants alike will only trust and embrace Open Banking payments when they understand them, so this education and knowledge sharing is a really critical step in the journey towards the so called ‘tipping point’ - where adoption grows at such a pace and momentum that its journey to becoming commonplace becomes both inevitable and welcome.

Holly Coventry

VP Open Banking Payments at American Express

Open Banking payments represent a technological revolution that shatters the traditional barriers of financial transactions. These innovative systems empower users to securely share their financial information and initiate payments seamlessly across different institutions and services. Notably, Open Banking payments offer merchants a low-cost, low-fraud addition to their payment stack, enhancing their financial operations.

The journey of Open Banking has evolved since the conclusion of the Competition and Markets Authority’s (CMA) retail banking market investigation in 2016, which led to the introduction of the Retail Banking Market Order 2017 (CMA Order) and the implementation of the Payment Services Regulations 2017 (PSRs 2017). However, a pivotal moment arrived in 2018 with the European Payment Services Directive, building upon the foundations laid by PSRs 2017.

This directive mandated banks and financial service providers to expose Open Banking API access to third parties, thus granting consumers and small businesses greater control over their financial data. This step made the payments market more integrated, efficient, and equitable for payment service providers.

Remarkably, the roots of Open Banking principles can be traced back more than four decades. In 1980, the German Federal Post Office conducted a ground-breaking experiment that invited 2000 users to test their online banking service.

This experiment, featuring financial transfers using a specified code, is widely regarded as the first instance of a self-service banking machine. It marked a significant shift towards giving consumers greater control and visibility over their finances.

https://www.consultancy.uk/news/34717/fraud-costs-uk-businesses-158-billion-eachyear#:~:text=Fraud%20is%20costing%20the%20UK,£8%20billion%20targeted%20individuals.

In recent years, the focus on enhancing consumer control and transparency has intensified, with Open Banking payments emerging as a key enabler of this transformation.

The journey from these early experiments to the current landscape of Open Banking payments is a testament to the persistent drive to revolutionise financial services for the benefit of consumers and businesses alike.

The current Open Banking Payment landscape

Fast forward to 2023, the landscape of Open Banking payments is transforming, firmly establishing itself on an upward trajectory. Data from Open Banking Limited paints a compelling picture of this evolution: payment numbers have doubled year on year, soaring to over 68 million transactions in 2022 from a mere 25 million in the previous year.

In July 2023, 11.4 million Open Banking payments were made, and year to date data gathered in August 2023 compared to the same period in 2022 has shown payments have more than doubled, showing an exceptional 102.4% growth2

For consumers, Open Banking payments offer a suite of advantages. They are quick, convenient, frictionless and completely secure. Notably, users have visibility of their bank balance before a payment is completed, supporting effective budgeting and financial management. Open Banking payments are also inherently inclusive, accessible to anyone with a UK bank account.

7

102.4% growth

On the merchant side, open bankingenabled payments streamline the often complex processes of reconciliation and cash flow management, offering merchants greater ease and efficiency in their financial operations.

Importantly, these payments come with significantly lower processing costs compared to other payment methods, and implementation is swift and straightforward. In many cases, it can be seamlessly integrated into existing payment stacks with just a few clicks.

Annual open banking transactions in 2021 and 2022

25 million

Despite these promising advancements, the current adoption of Open Banking payments, with 7 million active users among SMEs and consumers, represents just a fraction of the UK’s population.

The question that looms large is: how can we harness so much untapped potential and propel Open Banking payments into the mainstream, benefiting more individuals and businesses across the UK?

68 million

Barriers to adoption: Consumers

When we examine the landscape of Open Banking payments, we discover a two-fold narrative, with the UK fintech sector at the forefront of innovation. This sector has pioneered Open Banking technology, yielding tangible benefits for both consumers and businesses. However, while it excels in innovation, there are challenges related to understanding and trust surrounding Open Banking payments.

24%

Consumers concerned about adopting new online payment methods

Security emerged as a paramount concern, with 41% of respondents indicating that they would be encouraged to use Open Banking payments if they were perceived as a more secure way to pay.

Interestingly, the data also reveals a lack of awareness regarding the inherent safety of Open Banking payments, which include strong

86%

Consumers would like bank balance information before purchasing

The survey unveiled a clear need for additional guidance, with 40% of respondents expressing a desire for extra support, such as instructional videos and step-by-step guides, when trying a new payment method for the first time. At the same time, existing payment methods present significant pain points.

Nearly 69% of respondents expressed a reluctance to spend time entering unnecessary card details online, and a separate study found that 42% of shoppers would be deterred from returning to a retailer with a slow and cumbersome checkout process.

Furthermore, consumers are increasingly budget-conscious, with 86% of survey respondents stating their preference for staying informed about their bank account balances before making purchases.

40%

Shoppers would like support using new payment methods

“I don’t think most consumers know what an open banking payment is, or what it means to pay directly from their bank account.

69%

Consumers dislike entering card details

If there’s a centralized consumer education push, we can really break down some barriers.”

Advait Sinha Vice President of Product Strategy at Nuvei

Barriers to adoption: Merchants

Merchants, like consumers, place a premium on security, with a particular emphasis on minimising fraud. A report launched in summer 2023 highlighted that businesses faced staggering losses of £157 billion due to fraud in 20223.

Yet, understanding of the fraud mitigation benefits of Open Banking payments is not yet embedded among this audience. In addition to security concerns, merchants grapple with cost reduction. Against the backdrop of rising operating costs and overheads, the opportunity to trim payment processing expenses is attractive.

Yet, some may perceive the introduction of another payment option as added complexity during an already challenging period. Merchants can also be cautious about any additional workload which may come with integrating new payment options into their flow.

Working with a payment service provider which can offer them a variety of core acquiring services and alternative payment methods along

3https://www.consultancy.uk/news/34717/fraud-costs-uk-businesses158-billion-each-year#:~:text=Fraud%20is%20costing%20the%20 UK,£8%20billion%20targeted%20individuals.

£157 billion

with value added services through a single integration is usually preferred. Concerns about the potential impact of lower-cost options on payment quality also loom large. Venturing into uncharted territory can appear risky, prompting caution among businesses.

For larger enterprises, the process of implementing new payment methods can be lengthy, and this could be a deterrent if they’re not strongly invested in the potential benefits those payment methods could bring.

Furthermore, the industry has been engaged in discussions regarding the standardisation of refund processes. Merchants want transparency, and immediacy, and although options like Pay with Bank transfer powered by Amercian Express provide real-time transaction data and streamlined refund processes, there remain broader, industry wide concerns about whether banks have the account details necessary to process refunds, as well as the process for securing consent from both merchants and consumers.

75%

Consumers trust financial services offered by brands they already know

Finally, there is some tension when it comes to online vs in store payment innovation. Merchants may believe it’s easier to evolve or add to their payment stack online, but the process of doing so in store can often feel more unwieldy, and perhaps less popular among customers.

Nevertheless, consumer expectations are soaring. They demand an array of frictionless payment options and are quick to explore alternatives if a merchant falls short. This intensified competition is good for consumers, but it presents an added challenge for merchants. They are under pressure to adapt and innovate, and quickly.

Winning over customers

For merchants, articulating the benefits of Open Banking to customers is a challenge. But working with the right payment partner can help address that, particularly if that payment partner has a recognisable, trusted brand name that customers already interact with for other financial services (e.g. banking of Credit Cards).

However, there are some key industry wide priorities for improving customer understanding, in summary:

Simplifying technical jargon:

Addressing the widespread lack of understanding surrounding Open Banking requires comprehensive educational efforts. Simplifying payment processes and guiding consumers through them is key; as is considering different channels and ways of sharing the guidance and

Demonstrate Enhanced Security Measures:

Building trust is anchored in robust security measures, but people trust what they can understand. Therefore, highlighting the enhanced security inherent in Open Banking payments is paramount. 41% of the consumers we surveyed expressed a willingness to embrace Open Banking if it’s

Emphasis on Convenience and a Streamlined User Experience:

Convenience and a streamlined user experience resonate deeply with consumers. As highlighted in our research, 61% of respondents want greater control and visibility over their finances. They also want to complete purchases in as few clicks as possible.

They are frustrated by entering what they deem unnecessary details when making purchases and if a payment process has too many steps, it can often lead to mistrust, and an abandoned basket.

Educating and supporting merchants

To harness this payment method’s untapped potential, converting customers to Pay with Bank transfer is only half the equation. There are common misconceptions among merchants about the risks, integration time and complexity, and consumerfriendliness of such a payment method.

The following outlines the perceived barriers cited by merchants and simple ways they can dispel them or seek additional support:

Risk: Pay with Bank transfer helps mitigate fraud

Understandably, merchants are extremely vigilant when it comes to security, particularly on minimising fraud. Open banking can, in fact, help reduce fraud for merchants, yet many sellers aren’t clear how.

Pay with Bank transfer is a highly secure, bank-initiated authentication. Unlike card payments, no payment credentials are shared. When a customer makes a payment using open banking, they are always sent to the bank’s app to authenticate, usually with biometrics. In addition, working with a payment processor like Nuvei provides real-time fraud detection and scoring to stop transaction fraud before it can take place.

User experience: open banking provides transparency and speed

Merchants seek greater visibility and immediacy over customers’ refunds. While payouts are inherently slower than pay-ins across many payment methods, options like Pay with Bank transfer provide merchants with an entirely streamlined refund process and real-time transaction data.

A further concern is friction in store. However, QR codes can be generated for express payment at the counter. This is a great way to manage queues, especially if cashiers are equipped with tablets/terminals to process payments wherever they happen to be with a customer.

Complexity: simple ways to integrate

Pay with Bank transfer

Contrary to many merchants’ concerns, adding Pay with Bank transfer need not be a complex, time consuming process, nor does it require heavy lifting in terms of workload. Adding Pay with Bank transfer to your payment stack can be done almost instantly.

Working with a payment service provider like Nuvei can offer merchants a variety of core acquiring services and alternative payment methods along with value added services through a single integration.

Success stories

There are various industry verticals where Open Banking Payment methods are already relatively well established, thanks in part to the very clear use case and customer benefit.

Travel

Travel merchants encounter two main challenges: increasing costs of doing business and reducing fraud. Implementation of Pay with Bank transfer powered by American express offers cost savings, plus there is extra security as the product is SCA compliant, and requires biometrics to authenticate payment.

From a consumer perspective, Open Banking payments lend themselves well to making large, significant payments online, such as for holiday reservations. American Express asked consumers about their biggest concerns when looking at holidays online, and security topped the list. Two fifths said they would be open to trying new methods of payment, illustrating a clear consumer appetite.

Consequently, the industry has seen rapid adoption as both merchants and consumers recognise the benefits, and now 1 in 3 transactions are processed through Pay with Bank transfer powered by American Express in the travel sector.

“My initial doubts were why you would choose to pay this way when you already had a prepopulated payment option.

However, with the advent of the multifactor checkout process and QR code journey, the user experience has shown to be faster and simpler.“

Duncan Morgan Hotel & Packages Director, TravelUP

Bill payments

American Express research revealed that two in three consumers would like more control over how and when they can pay their bills, and over half (57%) said they felt the payment process for utility bills could be improved.

Open Banking payments offer the core merchant benefits of significantly reduced transaction fees and reduced fraud, and for consumers the opportunity to make a payment in real time, with visibility of their bank balance before they do so, has proved extremely popular. Pay with Bank transfer powered by American Express has reported a 72% adoption rate in this

Bricks and mortar retail

Open Banking payments are often associated with online transactions, but for one well known electrical retailer, Pay with Bank transfer powered by American Express has proven a popular payment method in store. Purchases in this context are often high value, and require a more consultative in store experience with an individual staff member.

Using a tablet to guide customers through product features, costs and options naturally leads to a more bespoke payment experience. The retailer gives customers the option to scan a QR code on the tablet, to make payment directly from their bank account.

“Adoption of Pay with Bank transfer from our business customers has been excellent. We have seen consistently high conversion rates and transaction values over £20,000.

Our customers find it easy to use and the feedback has been extremely positive.”

Financial Director from leading electrical retailer

Will Open Banking payments go mainstream?

The expert view

As we venture into the future, the horizon for Open Banking payments is teeming with possibilities and potential transformations. One of the most exciting prospects lies in the seamless integration of Open Banking with emerging technologies. As Artificial Intelligence (AI), the Internet of Things (IoT), and Blockchain continue to advance, their combination with Open Banking promises to revolutionise the payment landscape.

AI can enhance security and personalisation, IoT can enable innovative payment methods, and Blockchain can reinforce transparency and trust. This integration is not just exciting; it’s imperative for keeping pace with the rapidly evolving digital ecosystem. The evolution of Open Banking regulations and standards will play a pivotal role in shaping its future too. Continued industry collaboration and partnerships, exemplified by PwBt and Nuvei, will also broaden the reach of Open Banking payments.

The collective efforts of the industry can propel Open Banking into the hands of a broader merchant and consumer audience, unlocking its true potential.

Advait Sinha, Vice President of Product Readiness at Nuvei believes the future looks resoundingly positive.

He said, “When you think about a world where open banking payments are mainstream, that means traditional costs for merchants have been reduced significantly plus they get the benefit of real time settlements and reduced fraud.

Consumers have a mobile friendly solution to make payments, and with biometric authentication and no longer entering long card numbers it’s a very streamlined and convenient process- payment is complete in just a few clicks.”

Holly Coventry, VP of Open Banking Payments at American Express says that the pandemic and subsequent online spending shift it prompted, plus generally increasing card use over cash have carved out a clear pathway for Open Banking payments.

She said, “There is now a greater appetite and acceptance of digital transactions. Customers want a seamless checkout experience, both on and offline, and anything retailers can do to facilitate that will see them win loyal customers.”

“With more and more people using their mobile devices for shopping, an Open Banking payment led future feels inevitable and welcome, as it is answering a very clear demand.”

Advait Sinha Vice President of Product Strategy at Nuvei

“There are undoubtedly some concerns from merchants about what changes they think they need to make to embed Open Banking payments, but the technology and infrastructure is already there. Merchants need to be prepared to embrace it in the spirit of offering a consistent omnichannel experience.”

Holly Coventry, VP Open Banking Payments at American Express

ABOUT NUVEI

Nuvei (Nasdaq: NVEI) (TSX: NVEI) is the Canadian fintech company accelerating the business of clients around the world. Nuvei’s modular, flexible and scalable technology allows leading companies to accept next-gen payments, offer all payout options and benefit from card issuing, banking, risk and fraud management services.

ABOUT PAY WITH BANK TRANSFER

American Express is driving innovation in payments and Pay with Bank transfer (PwBt) reflects our commitment to delivering choice for UK consumers and businesses through new ways to pay.

Connecting businesses to their customers in more than 200 markets, with local acquiring in 45+ markets, 150 currencies and 634 alternative payment methods, Nuvei provides the technology and insights for customers and partners to succeed locally and globally with one integration.

Leveraging Open Banking, PwBt is another way Amex offers digitalfirst solutions to customers. PwBt is a secure debit (non-card) payment method that lets consumers pay via a direct transfer from their bank account, whether or not they are an American Express Card member.

For more information, visit www.nuvei.com

For more information contact pwbt@aexp.com

CONTACT:

Theodore Law

Or visit: www.americanexpress.com/uk/merchant/pay-with-bank-transfer.html www.linkedin.com/showcase/bank-transfer/