Short-term gain for Visa and Mastercard creates a silver lining for Open Banking

Whatever side you were on in the Brexit debate, it’s hard to imagine any merchant welcoming reports of the card schemes quintupling fees for cross-border payments between the UK and EU.

No longer constrained by the EU’s cap on interchange fees, Visa and Mastercard plan to increase their interchange to 150 basis points (bps) for credit card, and 115 bps for debit card transactions, as recently reported by the Financial Times. This compared to current rates at 0.3% and 0.2%, respectively.

This is a major blow to merchants, with cards remaining the predominant method of payment for UK consumers - and as a hard habit to break, merchants will be forced to accept this five-fold increase in processing costs.

The Open Banking alternative

Open Banking represents an opportunity for merchants to push back, with consumers having the ability to quickly, conveniently and securely initiate direct payments from their bank accounts.

The benefits are clear: Merchants receive their funds in real-time as opposed to days under card schemes, and at significantly lower fees. Open Banking payments are also inherently more secure, with bank grade security available to the consumer, whilst card fraud is eliminated.

Interoperable account-to-account payments

At Volt, we believe that new generation payment functionality comes in the form of APIs that can be embedded directly into applications, allowing for more customisation, analytics and control. 

Our gateway connects over 4,000 banks across the UK and Europe, as we work to standardise and operationalise the PSD2 API interface to a simple and single point of access. We provide multiple paths for each payment, removing single point of failure - whilst our machine learning technology smart routes for optimal performance, driving conversion and reliability. 

The challenge is in enabling seamless interoperability and a consistent application of the customer experience: 

Open Banking is not in fact a payment method, but a full-functional scheme with multi-currency, multi-clearing and functional variation across the network. For example whilst possible to clear payments instantly in the UK via Faster Payments (FPS), many banks in the EU are yet to implement the new SEPA Instant standard. 

The good news here is that SEPA Instant is now mandated on European banks by the end of calendar 2021, with the ECB requiring that payment service providers subscribe to the TIPS clearing mechanism - and instant becomes the new standard. 

Towards an equivalent payment experience

It’s my view that we will see convergence between card and the Open Banking payment experience, as new SCA requirements come into full force.Equivalence rules under PSD2 require that whatever interface a bank makes available to their customer through proprietary channels, must also then be made available via their PSD2 Open API. 

This would appear to point to a scenario where we see convergence in SCA flow and the customer experience between the two payment methods - with improvement in that experience a crucial lever in converting customers from cards, and the resultant benefits that then delivers to both merchants and end consumers.

Further, new Open Banking standards currently under development, such as Variable Recurring Payments (VRP) and Sweeping, will soon deliver a seamless single-click payment experience. 

Regulators too have shown their teeth recently with the European Banking Authority (EBA) making clear (directive dated 18 February 2021) that banks not meeting these requirements and driving a high quality experience for open payments will be subject to enforcement action.

The tectonic plates are shifting

The move on interchange by Visa and Mastercard may drive merchants to consider alternatives, as the compelling next generation of instant account-to-account emerges. 

Instant networks are set to dominate the global payments landscape. FIS Global reported recently that they expect account-based instant payment mechanisms to be their largest revenue stream globally by 2024.

And interestingly, where there is a consistent domestic standard in account-based payments,  they are already the leading and preferred method of payment. 

European examples of this are iDEAL in the Netherlands, Sofort in Germany, and Swish in Sweden. Internationally the Unified Payment Interface (UPI) in India, and the stratospheric rise of PIX in Brazil are examples of this new age of instant, finding strong acceptance and high adoption. 

Instant account-to-account payments, delivered in Europe via Open Banking, represent the future and should be considered a strong alternative in light of this callous move by the card schemes. Where historically we have relied on Visa and Mastercard as the backbone for global e-commerce, the future is different. The new spine is instant, global interoperable and account-to-account.