Over the past six years, UK banks and leading Third-Party Providers like Token.io have built a strong technical foundation for Open Banking. This collective effort has resulted in increased reliability, consistency, and predictability of bank connections, driving greater adoption of Open Banking-enabled services.
Early applications leveraged account information services (AIS) for account switching, personal financial management and multi-banking, yet the industry now recognises Open Banking's transformative potential in payments. Experts and evidence agree: Open Banking is reshaping the payments landscape in a permanent and profound way.
13 January 2024 marked the sixth anniversary of the launch of the Second Payment Services Directive (PSD2) in the United Kingdom.
Six years on, here are the six things about Open Banking-enabled payments I am most confident about.
1. Open Banking will make A2A payments mainstream
Innovation from real-time interbank clearing systems and open banking APIs represent the greatest potential disruption to financial services in a generation. The convergence of these technologies will propel Account-to-Account (A2A) payments to mainstream global adoption.
In Europe, A2A payments, notably in the form of Online Bank ePayments/OBEPs, have long been favoured by consumers in select countries such as iDEAL in the Netherlands or Giropay in Germany. However, prior to PSD2, the broader acceptance of A2A payments was impeded by fragmented national clearing systems, relegating them to the status of a niche alternative.
The advent of open banking APIs has effectively eliminated fragmentation in national clearing systems, making it seamless to integrate A2A payments at the point of purchase. This development is a catalyst for disruption, injecting much-needed competition into the payment landscape.
Nonetheless, transformation is a gradual process.
Back in 2021, I explained that “I was involved in internet banking in 2000 and mobile banking in 2010, and it took us 10 years to stop referring to these channels as alternative. I believe, with A2A payments, it will take half the time. In five years they’ll no longer be an alternative payment method – just a form of digital payment.”
I stand by this projection today. In many markets, ‘Pay by Bank’ will be a mainstream form of digital payment by 2026. Here’s why.
2. Consumers will come for the incentives and stay for the user experience
Consumers are initially motivated to try Open Banking-enabled payments — often called Pay by Bank — by a combination of curiosity, convenience, and incentives (such as loyalty point offers, or cash back).
However, the key factor that will drive continued adoption is the exceptional Pay by Bank user experience. Fast, secure, and seamless, Pay by Bank provides a level of convenience and simplicity that is hard to resist.
With Pay by Bank, users securely authenticate payments directly within their mobile banking apps, leveraging seamless app-to-app redirection and biometric authentication. This process eliminates the need for registration or error-prone data entry, providing a secure and hassle-free experience. Merchants are also relieved of the burden of sharing or storing confidential cardholder or user details.
Changing consumer behavior is a formidable challenge, yet recent statistics speak volumes. Over 600,000 Britons are embracing 'Pay by Bank' for the first time every month. Zoom out, in the last 2 years, nearly a third of the UK's adult population has made an Open Banking-enabled payment, with 11% now identified as ongoing Pay by Bank users.
3. Merchants will come for the savings and stay for the success rates
Open Banking-enabled A2A payments drive much-needed competition in the market.
According to the British Retail Consortium, the cost of card payments has been a source of strain for UK merchants, with card processing fees totaling over £1.26 billion in 2022 and overall merchant service charges increasing by 13% compared to the previous year. This rise in costs is rightly a “huge concern” for the retail industry, and has contributed to a notable decline in card usage in the UK in 2022.
With A2A payments, money moves directly from a consumer’s bank account to a merchant’s. This process bypasses intermediaries, reducing friction and significantly lowering transaction costs — factors that initially attract merchants to adopt Pay by Bank.
Historically, merchants have tolerated the high costs associated with card payments due to their ubiquity and high conversion rates. Open Banking has disrupted this status quo. A2A payments enable merchants to access nearly anyone with a bank account in Europe, and in many markets, they are achieving higher conversion rates than traditional cards. For instance, Token.io’s network spans over 567 million bank accounts. Through continuous connectivity testing and optimization, we have achieved transaction success rates exceeding 95% in our top markets. This level of efficiency and reach positions A2A payments as a viable and increasingly preferred payment option for merchants and consumers alike.
4. Payment companies will come to meet merchant demand and stay for better margins
When PSD2 was implemented in 2018, traditional payment methods, primarily cards, dominated 61% of e-commerce transaction values in Europe. By 2026, this trend is expected to reverse dramatically, with projections indicating that alternative payment methods (APMs) will constitute 62% of e-commerce checkouts across Europe. For payment service providers (PSPs) to succeed in this shifting environment, they need to offer a payment mix that ensures affordability, security, high conversion rates, and broad acceptance throughout Europe. Initially, in response to merchant demands, rather than aggregating dozens or hundreds of local payment methods, many payment companies launched their own ‘Pay by Bank’ solutions as a strategic defensive move.
However, as the preferred A2A infrastructure partner for many of the world’s leading payment companies, we have observed a significant shift in the PSP landscape.
PSPs are rapidly recognizing that Open Banking-enabled payments not only enable them to maintain their market presence but also to expand their market share. Importantly, these payments often yield higher margins compared to other APMs. This realisation marks a pivotal change in strategy, positioning Open Banking as a key enabler in the future of payments.
5. Payment companies will also come for cutting-edge technology and stay for a hands-on partnership
In the United Kingdom, to harness the full potential of open banking-enabled payments on the scale of systems like Pix in Brazil will require more than merely providing access to instant payment rails through open banking APIs.
Over the past six years, we have observed a trend among payment companies. Initially, they seek out an open banking technology provider, but soon realize that to achieve success and sustainable growth, what they actually need is an engaged and hands-on technology partner.
As open banking-enabled payments reach a critical stage in their maturity cycle, payment companies require comprehensive support. This includes assistance in identifying high-opportunity markets and verticals/use cases, as well as dedicated resources to drive both merchant and Payment Service User (PSU) adoption of ‘Pay by Bank’ solutions. Equally important is the provision of robust, hands-on customer support available 24/7/365.
At Token.io, we understand these needs and offer this additional layer of support to our partners. Our approach is not just about providing industry-leading technology; it's about partnership and active engagement. We don’t compete with our customers, rather, we actively enable them to grow. I believe this comprehensive support will be crucial in accelerating the momentum for open banking and Pay by Bank solutions in the UK over the coming years. Our commitment is to be at the forefront of this transformation, guiding our partners through every step of the journey.
6. Commercial Variable Recurring Payments are the future
The potential of commercial Variable Recurring Payments (cVRP) is immense and, arguably, still underappreciated. In Britain alone, with 30 billion consumer-to-business payments made annually, representing 66% of the country's total payment volumes, the scope for disruption in this segment is substantial.
Non-sweeping cVRP stands at the forefront of this change, poised to significantly challenge traditional payment methods by unlocking the full potential of Account-to-Account (A2A) payments. Commercial VRPs offer a superior solution for one-click e-commerce and recurring payments, being faster, more secure, more convenient, and more cost-effective. By enhancing the consumer experience and generating significant cost savings for merchants across a wider array of use cases, cVRP is set to revolutionize the payments landscape.
As a new A2A payment capability, cVRP will transition consumers from relying on a 'card on file' to using an 'account on file.' This shift towards making payments as seamless as possible will accelerate consumer adoption of A2A payments for various applications, including one-click e-commerce payments, subscription services, investment account transfers, utility bill payments, and in-person transactions like ride-hailing apps, public transport, parking, or even in cashier-less stores.
While UK banks were mandated to implement ‘basic’ (sweeping) VRP for the automatic transfer of funds between current accounts, their adoption of commercial VRP (enabling the movement of money between different current or savings account holders) has been sluggish. Consequently, the Payment Systems Regulator’s (PSR) recent regulatory proposal mandating the CMA9’s participation in multilateral agreements for cVRP, along with other initiatives intended to expedite the rollout of commercial VRP this year, is a significant development.
Commercial VRPs represent the future of payments. At Token.io, ensuring our partners have access to this cutting-edge functionality as swiftly as possible is a top priority. We are dedicatedly working towards this goal, driven by a passion to lead the charge in advancing the payments industry.
What’s next for Open Banking?
While the shape of the future entity for Open Banking in the United Kingdom is still being determined, one thing is certain: Open Banking has already made a significant impact on the UK’s payments landscape. Its continued evolution, particularly through the successful implementation and widespread adoption of cVRP, will be a decisive factor in solidifying the UK's status in the evolving world of open banking.
The UK government’s Future of Payments Review recently highlighted a growing dissatisfaction with traditional payment methods, emphasising the significant potential of Open Banking and Faster Payments to enhance competition and improve payment experiences.
Internationally, the convergence of instant payments and open banking APIs in Brazil and India, offers a compelling example. In these countries, A2A payment solutions like Brazil’s Pix and India’s UPI have impressively overtaken traditional credit and debit card transactions. As of November 2023, an astonishing 87% of Pix’s four billion monthly payments are processed through Brazil's Instant Payment System; Pix is clearly a model for leveraging the power of open banking to drive instant, account-to-account payments at scale.
With its robust Faster Payments system and the comprehensive mandate given to Open Banking Ltd, the UK has established itself as a global leader in Open Banking and a reference point for numerous countries crafting their own open banking frameworks.
However, the teacher may soon find itself becoming the student. Over the past six years, other regions have progressed in developing advanced open banking functionalities. Noteworthy among these are Europe's SPAA scheme, set to introduce Dynamic Recurring Payment capabilities similar to VRP, and Brazil's analogous Pix Automatico functionality, anticipated to be operational within this quarter. This shift suggests that the UK, once the Open Banking trailblazer, may now have lessons to learn from emerging global practices.
Our industry must collaborate effectively to make cVRP capabilities widely available as soon as possible. This will not only reaffirm the UK's position as a leader in Open Banking, but also place it at the forefront of the global retail payments sector.