By Clayton Weir, Co-founder and CEO of FISPAN
We are living in a period of hyper-growth in the financial services sector. New merchants, neobanks, FinTechs and third parties are entering the market offering more convenient digitized services. Consumers have more choices and customizable banking options than ever before. Since the onset of the COVID-19 pandemic, many transactions have gone digital and merchants have focused on transitioning to cashless payment methods.
Open Banking is a secure way for financial institutions to provide third-party financial service providers with access to consumer data and APIs and can provide even more opportunities for innovation in the e-commerce space. For e-commerce merchants, providing convenient and accessible alternative payment options to customers can increase current revenue streams and open new ones, while expanding your customer base. Open Banking can lead to an influx of access to technology that can transform the way payments are made and processed.
Customers will only choose to adopt a new system or technology for the payment process if it improves or matches the experience they are used to. It also gives them more options that better suit their needs for that specific purchase, how they want to pay for it, or what’s best for them at the time. By removing friction, Open Banking can enable smoother customer journeys by creating a more customizable experience. Open Banking will drive solutions and innovations across retail, e-commerce, consumer and commercial banking channels, creating more integrated and easily accessible ways to conduct your business.
Alternative payment methods
We can already find competitive alternative payment options available in the market and offered by FinTech powered merchants. On the merchant side, credit card transaction fees have always been a point of contention – a necessary part of doing business but certainly at a cost. The advantage of these new alternative payment methods to cards introduces lower transaction costs and merchant fees.
- “Buy now, pay later” (BNPL) offers online customers interest-free financing options on retail purchases over a series of installments. For example, FinTechs PayBright and Klarna offer the option of bi-weekly or monthly payments. With BNPL, you can finance your online purchases in the same way as your car or house payments, but in this case, it does not affect your credit score. The BNPL market is expected to grow by almost 400% by 2025, but there is still room for competition from financial institutions and card networks to get in on the action. The BNPL has been led mainly by merchants, but in the future it will probably also prevail with the card networks and be led by them.
- QR code payments are a secure form of contactless payment that allows customers to scan the QR code to confirm and process payment through their device. We’ve seen companies like Square, Tencent, and Venmo use it extensively in retail and restaurant environments.
- Interbank transfers allow users to make immediate and secure payments between bank accounts and currencies. For example, companies like Wise (formerly known as TransferWise) allow customers to transfer between bank accounts and various currencies at a lower rate than most financial institutions and withdraw from an ATM virtually anywhere.
Fueled by the pandemic, global e-commerce sales surged to reach $26.7 trillion while retail sales declined significantly. As a result, cash payment has become obsolete for many businesses and “cashless” electronic payments have taken over. As we approach what we hope will be the end of the pandemic, it is evident that consumers around the world have become more accustomed and more comfortable with alternative payment methods.
Next steps for banks and card networks
The popular assumption is that financial institutions and card networks will suffer because of Open Banking and the increase in alternative payment methods. To demystify this, let’s explore how this is a real business opportunity for both parties. As BNPL is merchant-led, they see it as an opportunity to provide more options to their customers and to make sales they otherwise wouldn’t have been able to make. However, it is likely that we will see card networks take over in the near future.
In today’s market, we are already seeing banks and card networks working together:
- Citigroup – Citi Flex Pay: Cardholders can use their card’s credit limit to borrow money easily and at lower cost than the high interest rates typically charged by credit cards.
- P. Morgan Chase – My hunting plan: Allows customers to pay for large purchases over time for a fee, but remains tied to traditional bank credit cards.
- Payment in installments : Mastercard and Visa allow cardholders to split transactions into multiple installments.
Across all industries of e-commerce, retail banking, consumer and commercial banking, users are looking for the most convenient, easy and efficient way to make payments. Open Banking will benefit every industry through innovation, integration and customization. For banks and card networks seeing this emergence of alternative payment methods, there are still many market opportunities to enable similar experiences for your customers.