Traditional payment card acceptance is convoluted and expensive...for now. The payments road ahead is promising to offer better options, reduced fees, and instant funding.
Open Banking abroad has expanded payment options for customers as they gain the ability to securely share financial data across financial institutions. This frees them up to obtain financial services from providers they choose, including non-financial entities. The reliance on Application Programming Interfaces (APIs) — something domestic payment companies are also leaning into — enables customers to give permissions for APIs to expose data, processes, and algorithms to financial institutions they select. APIs facilitate the sharing of information, allowing customers to compare and contrast benefits and costs between payment offerings. Ultimately, customers enjoy payments that meet their needs — without friction and at a lower cost.
What started as a new PSD2 compliance hoop to jump through for banks has become a way to new revenue streams for banks and other payment entities alike. The key will be in harnessing the opportunities presented by APIs to meet evolving customer needs and to enjoy lower payment acceptance fees.
The Payment Model is Changing
As banks begin to create APIs for other technology companies to integrate and build on top of, the possibilities for new payment models are endless. One of these innovative third-party financial service models is an Electronic Money Institution (EMI), which is a company that is licensed to provide financial services to third parties as an alternative to traditional banks. EMIs are fast, agile, digital, compliant, and safe. PayPal and Apple Pay are both EMIs of note, facilitating the sending and receiving of digital payments.
Open banking presents a unique opportunity for EMIs that could have significant implications when it comes to the introduction of new services and the fees around those services. At the end of the day, open banking will enable banks to offer services similar to EMIs; however, their sheer size and reliance on legacy systems will hinder that evolution, giving EMIs a head start on creating improved services and capturing business in the meantime.
Juniper posits that almost half of the world’s population will use some form of digital wallet within the next four years, giving EMIs a launchpad to take advantage of open banking. APIs can help EMIs cut costs, improve the user experience (UX), and launch new services quickly. We’ve already seen this happen with Account-to-account (A2A) payments, which, like P2P payments, facilitate the transfer of funds from one account to another.
A2A payments have implications for digital wallets, offering the possibility of removing intermediaries and associated costs (e.g. card schemes, interchange fees, and processor fees) in favor of a much lower transaction fee. Near-instantaneous clearing of funds makes them appealing to customers and the absence of punitive card acceptance fees makes them appealing to merchants.
Reducing and Removing Transaction Fees
EMIs are just one example where middlemen and fees can be cut. Online payment acceptance fees have been on the rise for a while, prompting some merchants to add their own fees at checkout. Between processors, issuers, gateways, and acquirers taking a slice of the transaction pie, there is little left for merchants.
With options like A2A payments, merchants can accept payments without handing over a hefty portion via fees (up to 4%, in some cases) to payment providers, card brands, and other intermediaries. What’s more, open banking reduces fraud tied to payment cards, leading to even more savings for merchants — and less frustration for customers.
Emerging Technologies, Sans Fees
Companies like Trilo are taking full advantage of the open banking opportunity, leveraging open banking payments APIs with rewards for consumers that use bank-to-bank payments. Trilo works on a monthly subscription model, which allows them to do away with transaction fees for merchants. The other benefit for merchants that use Trilo is that they receive funds within 5 minutes rather than waiting the days it typically takes for payment card funds to get to a merchant’s bank account.
Citizen, a Payment Initiation Service Provider (PISP), facilitates A2A transfers. Like its open banking counterparts, Citizen removes the middlemen along with the fees they charge. Instead, the cost of the transaction is set by Citizen and is much lower than the combined fees a merchant would typically pay to card brands, processors, and banks. Just like Trilo, funds settle instantly, unburdening merchants from the delays of using traditional payment card infrastructure.
While attitudes around open banking remain mixed in the U.S., progress continues. While other countries have embarked on the open banking journey due to regulatory requirements, similar initiatives are likely to be industry-driven in the U.S. Open banking promises accelerated digital transformation and new, lucrative business models. FinTech and payments companies are well-advised to keep a finger on the pulse of these developments stateside and abroad.