Open Banking and PSD2, a groundbreaking regulation from the United Kingdom and the European Union, respectively, set out to fix what politicians and officials perceive as a poorly-functioning financial services market, evidenced most prominently by the banking crisis in 2008. It is also closely linked to the EU GDPR privacy directive, which aims to ensure that citizens have better access to and use of their own personal data.
Central to Open Banking is the requirement that banks open the data they own and offer an API to allow customers to optionally share financial information with external providers. The idea, among other more innovative use cases, is to make it easier to shop around in financial services or change bank accounts entirely.
Additionally, a second aspect of Open Banking, possibly targeting the Visa-Mastercard duopoly, stipulates that banks offer an API to allow customers to authorize payments directly from their bank account as an alternative to other types of payments, such as payments with card or manuals. Bank transfers.
Enter TrueLayer, the London startup that created a development platform to make it easier for Fintech and other adjacent companies, such as retailers, to access banks’ APIs and in turn travel on Open Banking and PSD2 . Today, the young company is launching a beta version of its own Open Banking-based payments API so that businesses can start accepting payments through Open Banking.
By using the payment initiation process created by PSD2, TrueLayer says its new API offers a number of benefits over other payment options:
The first is immediate settlement whereby cleared funds are received in just a few minutes, as is the case with any bank-to-bank transfer using “Faster Payments.”
Second, security, as the API requires active bank authentication before any money can leave the account. “This means high security and extremely low fraud rates,” states TrueLayer. That is not pure hyperbole: the nature of the payment initiation process, as stipulated by Open Banking, means that the customer must sanction any payment request within the application or the website of their own bank. The user’s journey (shown in the video below) says something like “hey my bank, please make this one-time transfer on my behalf to X”. The person or company that receives the payment never sees your bank details (or card details, for that matter).
Third, it is cheaper since the payments do not have the high fees of card transactions.
Lastly, the user experience is arguably more streamlined than other payment options, including traditional bank transfers. For example, customers do not need to manually enter a business bank account number to transfer money to a business.
“Both businesses and consumers will benefit substantially, but I think the biggest winner will be merchants, application providers and SMBs,” TrueLayer co-founder Francesco Simoneschi tells me when I ask who the main benefactors will be. .
“Faster payments reduce the time it takes for a payment to go from days to seconds. This is a crucial factor for many companies where instant settlement and transaction risk are big concerns. Add to that the minimal costs involved to process a payment and our API will make a huge difference in a short amount of time. We think that many companies will end up sharing these savings with their clients ”.
Simoneschi won’t be attracted to saying who will be the biggest loser under the new payments directive, arguing that it is not a “zero-sum game.” “However, we believe that the initiation of payment is disrupting the four-part model of existing card networks,” he adds.
This is because the initiation of payment is done through a direct relationship between the merchant and the customer’s bank. And while Simoneschi doesn’t think it will happen overnight, he believes that as merchants start incentivizing Open Banking payments for their customers, they are likely to gain traction quickly. One of the ways that credit card companies remain competitive, he says, is to adopt and improve the Open Banking payment initiation by adding services like dispute management.
“It’s also worth noting that banks generate a substantial amount of revenue from the fees involved in credit and debit card transactions,” says Simoneschi. “These fees are paid by merchants, and indirectly, by consumers. Reducing these transactions could affect the bottom line of some of the major banks. Another factor is how a few banks make money as the “acquiring bank,” a bank that merchants use to receive and settle funds. PSD2 and Open Banking eliminate both parts of this equation, essentially making that role obsolete. “
Meanwhile, when asked which use cases are best suited for this new payment method, Simoneschi says the most obvious is any scenario where payment is typically made by manual bank transfer. For example, services that require you to top up your account, such as international money transfer apps, cryptocurrency exchanges (or even a prepaid mobile phone account) are ideal candidates. He also believes that managing or facilitating B2B payments, such as vendor-requested payments, is another very good option.
In the long run, though, that’s just scratching the surface. It’s not hard to see big merchants, like Amazon, embrace Open Banking in such a big way as to avoid Visa and Mastercard as much as possible. For those merchants with fewer resources, services like TrueLayer will likely help them do the same over time. In other words, the payments space is about to get interesting, again.