Open Banking Breathes New Life Into Card Networks

By Clayton Weir, Co-founder and CEO of FISPAN

We are living in a period of hypergrowth in the financial services industry. New merchants, neobanks, FinTechs, and third parties are coming to the market offering more convenient, digitized services. Consumers have more choice and customizable banking options than ever before. Since the onset of the COVID-19 pandemic, many transactions went digital, and merchants became focused on transitioning to cashless payment methods.

Open Banking is a secure way for financial institutions to provide third-party financial service providers access to consumer data and APIs and can grant even more opportunities for innovation in the e-commerce space. For e-commerce merchants, providing alternative payment options that are convenient and accessible for customers can increase current revenue streams and open new ones, while expanding your customer reach. Open Banking can lead to an influx of access to technology that can transform how payments are made and processed.

Customers will only choose to adopt a new system or technology for the payments process if it improves upon or matches the experience they are used to. It also provides them with more options that better suit their needs for that specific purchase, in ways they want to pay it or what is more convenient 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 methods to conduct your business.

Alternative Payment Methods

We can already find competitive alternative payment options available in the market and offered through merchants powered by FinTech. On the merchant side, credit card transaction fees have always been an issue of contention – a necessary part of business but certainly at a cost. The benefit of these new alternative payment methods to cards introduce 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 provide the option of biweekly or monthly installments. With BNPL, you can finance your online purchases similar to your car or house payments, but in this case, it doesn’t affect your credit score. The BNPL market is expected to grow almost 400% by 2025, but there is still space for competition from financial institutions and card networks to get in on the action. BNPL has been led predominately by merchants however, in the future it will likely also prevail with and be led by card networks.
• QR Code Payments are a secure form of contactless payments that allow customers to scan the QR code to confirm and process the payment through their device. We’ve seen companies like Square, Tencent, and Venmo utilize this extensively in retail and dining environments.
• Interbank Transfers allow users to make immediate, secure payments between bank accounts and currencies. For example, companies like Wise (previously known as TransferWise) enable 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 heavily increased to $26.7 trillion while retail sales significantly decreased. As a result, paying by cash became obsolete for many businesses, and “cashless” electronic payments have taken over. As we approach what we hope is the end of the pandemic, it is evident that consumers worldwide have become more accustomed and 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 increased alternative payment methods. To debunk this, let’s explore how this is a real commercial opportunity for both parties. As BNPL is being led by merchants, they see this as an opportunity to provide more options to their customers and make sales they wouldn’t have otherwise 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 conveniently and less expensively than the high interest rates credit cards typically charge.
• P. Morgan Chase – My Chase Plan: Allows customers to pay off big purchases over time for a fee, but is still linked to banks’ traditional credit cards.
• Paying in Installments: Mastercard and Visa are enabling cardholders to split transactions into installments.

In all e-commerce, retail, personal, and commercial banking sectors, users are looking for the most convenient, streamlined, and efficient way to make payments. Open Banking will be a benefit to each sector through innovation, integration, and customization. For banks and card networks who are seeing this emergence of alternative payment methods, many market opportunities remain to enable similar experiences for your customers.