2020 was the year of digitisation. The pandemic acted as a catalyst in every industry in bringing about the need for the latest tech. The financial industry was no different. Whilst cryptocurrency has seen a huge increase in interest, Open Banking has also quietly been garnering growth. The issue with Open Banking is, like with cryptocurrencies, few consumers truly understand the full scope of it. Whilst its adoption has been successful in the UK, the same cannot be said for the US… yet.
As Director of Nuapay UK, Nick Raper oversees the sales, marketing and product teams and is responsible for spearheading the company’s growth particularly within the Open Banking space. Prior to joining Nuapay, Raperwas the Principal at A.T. Kearney‘s London office. Working globally, he led projects predominantly across the financial services and energy sectors. This was following his tenure as Strategy Director for American Express‘ international business.
Looking to the West, Raper discusses the global real-time payments opportunity in North America:
Much like the rise of cryptocurrencies, few consumers truly understand the full scope of what Open Banking offers. Arguably, though, that’s not a concern if the services and benefits of using Open Banking are made readily available to end-users.
And that is exactly what we’ve been seeing in the UK of late. Adoption of real-time, account-to-account payments has been rising at a rapid pace, with merchants and consumers alike benefitting from a world of Open Banking-powered frictionless, low-cost, instant, and secure payments.
Leading with infrastructure
The UK’s Competition and Markets Authority (CMA) implemented Open Banking to expedite the UK’s Open Banking capabilities and increase competition in the finance services market. Now, considerable market focus is on fintechs, such as Nuapay and Trustly, facilitating real-time payments and the potential value to merchants and customers alike from these solutions. And progress is being made, the Open Banking Implementation Entity (OBIE) announced that in February 2021, for the first time in a calendar month, more than 1 million Open Banking payments were processed in the UK.
It is now expected that there will be increased attention focusing on the global rollout of Open Banking, particularly in markets like the US.
The challenges at bay
The US Open Banking market is unlike any other. As the biggest financial services market in the world, it has the most to gain from innovation and new solutions. Yet it presents a complex regulatory environment, with varying government agencies and state-level involvement and a general aversion to strong regulation. The lack of regulation has created little pressure or incentives to encourage the banks to embrace open APIs. Despite this, the US has made great progress in developing its Open Banking offerings, and the US is host to some of the market leaders in Open Banking such as Plaid, Finicity, and MX.
With little to no real-time payments infrastructure or regulatory oversight, Open Banking-based payments have not yet emerged as a truly competitive alternative to today’s payment methods in North America. This is despite significant demand in the market for alternatives, as merchants and payment providers look to avoid the particularly high costs of existing solutions in the US.
One such cost is interchange fees, which are set by the card schemes and charged to merchants every time a customer uses a credit or debit card to make a purchase. Already high, a further increase in Visa and Mastercard credit card fees is also expected to take effect next year, although the Justice Department is currently investigating whether Visa is engaging in anticompetitive practices toward merchants.
Another obstacle is chargeback fees, which for merchants in the US means lost revenue, plus also paying the significant fees associated with processing chargebacks. In the US, these costs continue to increase and are yet to be addressed by regulators. Chargeback fees can range from anywhere between , but merchants stand to lose two to three times the transaction amount due to operational costs.
With Open Banking, processing fees of any kind are significantly lower, as payments avoid card networks altogether. Payments are authenticated directly between consumers and their banks, meaning merchants can avoid any chargebacks generated due to fraud or an inability to capture funds, and the consumer never needs to hand over their banking details or passwords – resulting in further security benefits.
With this in mind, you can begin to understand why developers and entrepreneurs state-side have been waiting on real-time payments infrastructure.
Change is coming
Though the US market introduced real-time payments infrastructure much later than other technologically similar markets, it’s set to see significant uptake soon, with two schemes now live and a third underway. The Clearing House and Zelle are the two schemes enabling fund transfers and real-time payments that are already in place. The third network, FedNow, comes from the Federal Reserve, and will enable real-time payments for banks of all sizes. To date, these payment schemes have seen only a small portion of total transactions, but ACI is forecasting this to grow at more than 42% per annum over the next 5 years.
The turn-on and acceleration of instant payment schemes such as FedNow will see another round of product investment to develop more merchant-focused solutions. Once the market has merchant buy-in, consumer awareness will increase, helping to make the benefits more tangible, leading almost certainly to growth in demand. Equally, we will likely see increased interest from international players entering the US to take advantage of the growing market. EML Payments recently acquired Nuapay (pending regulatory approval) and intends to expand its Open Banking platform to North America.
A global network is in sight
Throughout the markets where real-time and account-to-account payments infrastructure has been prioritised, significant progress is being made both in terms of the technology’s adoption and education on its benefits. As we begin to see similar developments in the US, the prospect of a global, real-time payments landscape becomes significantly more tangible.
It won’t be picture perfect immediately, and there will be kinks to iron out along the way, but the benefits for all providers in the ecosystem are strong to provide a more competitive, fast, and secure payment alternative for merchants and consumers.