Last weekend saw the launch of the new open banking regulation also known as PSD2. And while increased regulation can sometimes put the brakes on innovation, this one certainly doesn’t. On the contrary, the directive aims to step up innovation in payments by obliging banks to make APIs to their core systems — both data and payments — available to other companies. Paysafe is on the leading edge, with Skrill already in receipt of a PISP licence, which means we can now access and use bank APIs to create exciting new products.
In this new world, fintechs no longer have to work within the limitations of legacy bank infrastructure. Instead, they can grasp the opportunity to refine their user experience, making it even more seamless and frictionless. More to the point, open banking — as well as the faster payments rollout in the UK and EU — may well result in card volumes shifting to online bank transfers, creating an environment ripe for disruption.
Visa and MasterCard have already taken steps to neutralise this threat by acquiring businesses that specialise in bank transfers. As for us here at Paysafe, we’re finding that Rapid Transfer — which allows users to send funds from their bank account in real time — is one key service that will benefit from these developments. And this holds especially true in Austria and Germany, where over 80% of all transactions are still cash- based.
Rapid Transfer and the push-pull of scale vs profit
Rapid Transfer and other services specialising in bank transfers are particularly successful in cash-centred markets like Poland and the DACH region because they bypass cards, which haven’t taken off as readily as they have in the UK, for instance. As such, they’re very much customer-led propositions. Which means merchants are primarily offering them in order to satisfy demand.
As the potential to lower transaction costs (there are no interchange fees on bank transactions) becomes clearer, more merchants will warm up to these services, even outside cash-based markets. Regulation should also make it easier to provide greater customer benefits: not just less friction but better access to global financial data and therefore, greater empowerment. However, there are also more tangible benefits such as cashback and loyalty rewards. This is bound to enhance customer appetite even further.
But it’s not all roses. The price of payments is also intensely competitive. For businesses that have already achieved scale, large volume at low margin makes economic sense. For the rest, there will be a need to differentiate based on the ability to keep transactions as seamless and frictionless as possible. So, while we’re entering a world of new and exciting possibilities, the boundaries are quite set. The upshot for fintechs is the potential to leverage banks’ customer data, applying their technological expertise to create a superior user experience.
Open banking’s global potential
Open banking is gaining traction not just in Europe, but globally. Indeed, according to independent research by Ovum, instant payments will overtake payment cards by 2024 and be worth €338 billion by 2027. It’s clear then, that card payments’ market share is expected to go down in favour of instant bank transfers enabled by PSD2 APIs. It’s far easier to pay by bank username and password than it is to manually enter card numbers.
Several North American banks have also launched Open Banking Developer Portals. And they’re watching developments in Europe with interest. Meanwhile, South Africa seems poised to spearhead regulatory efforts on the African continent, even as API use cases are being developed to help the ongoing drive to increase financial inclusion.
But perhaps the most exciting developments are happening in India, where the Unified Payment Interface, or UPI, is already changing the way customers and banks interact in fundamental ways.
UPI aggregates all the accounts held by a consumer in one single interface, allowing them to make transactions from any one of their accounts from one place. Crucially, payment can be made through a unique virtual address. Which means there’s no need to share bank login details, account numbers or other sensitive financial information.
Back in Europe, it’s obviously still early days. However, it seems likely that major players such as Google, Amazon and Apple will look to develop a superior user experience, of which they are all pioneers.
The future lies in the hands of those who’ll be able to adapt quickly, standing out by building trust and offering a differentiated user experience. So, the right collaboration and chemistry could make all the difference in what is sure to be a crowded market post-PSD2.
Clearly, we’re approaching the crest of a new wave in fintech. But as with any gold rush, it’s important to know who your friends are.