Cardless, real-time payments for companies
Traditionally, transferring money between banks is slow.
New Alternative Payment Methods (APMs) don’t just offer a different payment experience to credit cards. They tend to use better infrastructure, made possible by regulatory and technological developments.
The trend is towards fewer intermediaries and less interruptions in the process of moving money. This creates the opportunity for payment providers to offer lower payment fees and reduces settlement times.
What do we actually mean when we say ‘faster payments’?
APM types and payment models
Payment via online banking
This is a payment made from the bank account of a consumer, without the need to enter credit card information. They just choose to pay on web or mobile, and approve the payment within the online banking environment or banking app.
This type of APM has already seen significant growth and adoption by consumers in some countries; Belgium’s BanContact, Germany’s Sofort and the Netherlands’ iDEAL. The latter was created in 2005, growing to a 57% market share by 2018.
But many of these older bank transfer methods are based on screen-scraping technologies. Screen scraping has been criticised for its slowness, inherently poor security and inability to provide continual access to data. It’s still cheaper for the merchant than card schemes, but settlement times could take up to a full working day and transactions can also be blocked for high-risk markets. With the settlements being late, merchants can also suffer significant chargebacks. However, a lot of these systems improved over the years, allowing people to easily scan a QR code and directly pay with their biometrics (face id or fingerprint). In my last paragraph “Players in an online payment”, I will explain the differences between payment preferences in European countries. What you can see is that in countries where there are bank based APM’s, the adoption sometimes overtook cards.
Open Banking / PSD2 provides a framework for fintech companies to offer new products and services based on direct access to consumers’ bank account data. The EU’s legislation aims to lower the barrier of entry for new fintech companies, protect consumers, and encourage lower prices.
Merchants can provide their customers with improved bank-based payment methods, avoiding the issues of screen scraping. Open Banking has enabled API-based transfers of funds with instant confirmation and settlement. Especially for merchants that operate in high-risk markets (gambling, crypto, FX, stocks) this can be a better option than current bank payment systems like iDEAL (in the Netherlands). Which frequently have blocked transactions and also suffer a significant percentage of chargebacks. For countries where there are no bank-based APM’s, Open Banking has a good chance of obtaining a lot of market share.
Digital wallets
Digital wallets (or eWallets) is a type of pre-paid account in which a user can store their money for any future online transaction, this can be done with just biometric/password authentication of the wallet.
Digital wallet providers need an e-money license but not a banking license. Although with well known wallet providers you can ensure your money is safe, only if companies have a real banking license, your money is guaranteed up to a certain amount. Paysafe, PayPal, Skrill and Neteller are examples of digital wallet providers.
Many wallets are expanding beyond traditional credit options to include alternatives like financing. Although their fees are still quite high for the merchant, for consumers it’s a convenient way of paying, since you can link your bank account and pay directly with just logging into your account.
Delayed payment and instalments
Paying later or in a series of instalments can be attractive options for a customer making a larger one-time purchase. Financing options like this are being extended to a greater range of products than ever before.
Companies such as Klarna are innovating to provide consumers with credit. This is for instance a very popular check out payment option at the clothing website Asos. Creditworthiness assessments are being made more easily since those companies can easily extract information from their online profile. Machine learning has gained a well-deserved spot and role in these initiatives, to help lenders check and approve loans with no risks.
Direct debit payments
This is one of the most frictionless payment methods, being at hand for the consumers’ recurrent payments when it comes to subscriptions and bills. It is now a great opportunity for merchants as well, instead of connecting with a bank or Direct Debit bureau, they can partner with a debit provider and connect with the direct debit scheme via an API. Direct Debit might be good for recurring payments, but not for single time purchases on the internet. Or topping up account balances on crypto exchanges, stock exchanges and gambling platforms.
Cryptocurrencies and stablecoins
Cryptocurrencies have been a wellspring of innovation and controversy. Bitcoin, the first and most well known cryptocurrency, has experienced tremendous growth over the last decade. It still has its flaws as well, since it’s not being used as much as a medium of exchange yet. The lightning network is currently in development, a layer-2 protocol on top of the Bitcoin blockchain, aiming to make transactions both cheaper and faster.
Regulators around the world are deciding on how to regulate this new type of asset class. Many central banks and even FAANG companies like Facebook, are starting plans to create their own cryptocurrency. Their goal is to create a ‘stablecoin’, that’s a cryptocurrency linked to either fiat currencies or government bonds, making it less volatile and easier to transact. Expect a lot more news around this topic and it might be a game-changer in the payment industry over the next couple of years.
Open Banking payments
Open Banking is creating a space for fintechs to offer even more alternatives. Open Banking is the UK implementation of PSD2. PIS services enable new opportunities for account-to-account payments. See here the examples for gaming companies and cryptocurrency exchanges.
These payments are especially interesting for high risk markets, since gateways offer higher fees on card schemes in those markets and since the transactions are account-to-account, they cannot be blocked or controlled as easily. Open Banking payments can be cheaper than any other APM.
Interesting to see is that APM’s can be quite pricey compared to card schemes in some markets. However in high risk markets, gateways can ask up to 3% for card payments. By gateways is meant companies like Worldpay, Adyen and PayVision. The average card payment is around 1,5%. This could fluctuate according to the industry and country. High-risk markets like crypto FX and gambling can be charged much higher fees or processing times.
Another FAANG company who earned significant market share in payments is Apple. Their Apple Pay made its way into consumer devices by paying with a card with your biometrics. Just recently the tech giant also announced creating its own credit card, together with Goldman Sachs, trying to take a significant market share of the neobanks industry.
Many payment gateways like PayVision Adyen and Worldpay saw tremendous growth over the last couple of years due to so many APM’s making an entry in the market using the latest checkout technology.
Players in an online payment
Payment gateways are the online equivalent of a card terminal in a brick-and-mortar shop. They integrate directly with the webshop or own systems via an API. Their role is to securely capture and encrypt the card and transaction data before sending it back to the vendor’s web server and onto the payments processor.
Gateways often provide multiple payment options and currencies, as well as fraud detection to protect the merchant; including AVS checks and velocity checks. Gateways charge merchants a one-time setup cost as well as monthly fees and transaction fees.
The payment gateway communicates with both the merchant and the payment processor. Payment processors mediate between payment gateways and the other financial institutions involved in a payment, authorising transactions and facilitating the transfer of funds.
Payments landscape in Europe
Just a few of the many APM’s and card schemes are widely accepted. Card schemes still dominate highly compared to bank payment systems. eWallets are also a popular way of paying, of which PayPal is the first and best known. You can see that in the UK card payments take such a high percentage, while in the Netherlands iDEAL dominates with 80%. Countries that have well established bank payment systems use cards much less. According to statistics, only 25% of the people in Germany have a credit card. Besides SoFort, about 16% of all online transactions are made by GiroPay (SoFort alternative). That’s why less merchants offer card payments in that region.
Conclusion
Recently there has been a flood of innovation in payments. New methods including bank-based payments are convenient and typically have lower fees. This has been made possible in Europe by Open Banking, which created an opportunity to make bank-based payments a reality for all European customers. These payments settle faster and carry a lower risk of fraud and chargebacks (they use Strong Customer Authentication by default).
Citizen is a payment system that uses PSD2’s Open Banking payment system for companies looking to decrease friction in their payment flows. Our ultimate goal is to align payments with identity, so customer onboarding can be as flawless as possible. Interested in knowing more? Email info@paywithcitizen.com or have a look at our website, where you can subscribe to our newsletter!
