Open Banking payments – reasons behind the slow uptake:
There are a number of reasons why growth has not accelerated in the way that the industry expected. Firstly, Open Banking still has an image problem – the term is not well understood by consumers, which has hindered the clear communication of the benefits to the public. In 2024, we’ve seen some cohesion around the term ‘Pay by Bank’ to describe the payments category, which is sure to help.
Secondly, we still see that a subset of banks’ Open Banking APIs are underperforming – the result is a poor user experience. More effective regulation is a starting point, but improved industry collaboration is needed, accompanied by a concerted effort by banks to deliver on Open Banking’s potential.
We’ve also seen mixed results with the commercialisation of Open Banking payments. Touted by some as a low-cost alternative to cards, there’s a perception that Open Banking payments should be ‘cheap’ – but this is an oversimplification. While it’s true that by disintermediating card schemes Pay by Bank delivers lower processing fees, it’s the gains in terms of operational efficiencies that deserve more attention. I believe that providers are becoming more focused on the value-added services they provide – from automated reconciliation to FX management – as a differentiator. Rather than a race to the bottom on pricing, we need viable commercial models so that merchants reap the full benefits, and providers can build stable businesses for the long haul.
Despite a range of challenges, there are a number of reasons for optimism about the year ahead and the direction of travel for Open Banking payments.
Consumer awareness is high:
Our Instant Economy Payment Insights report, based on fieldwork conducted earlier this year, revealed that 73% of European consumers are familiar with Pay by Bank. That rises to more than 90% in Spain (where Bizum is a popular P2P payment method), the Netherlands (where iDEAL is the well-established ‘local champion’), and the UK.
Public consciousness is already high, and what’s more, there’s considerable appetite to try new online payment methods. In Germany, 40% are willing to try a new payment method, while in Spain it’s 50%. Amongst 18-29 year olds, there’s even greater interest, with 51% and 57% in Germany and Spain respectively. What is lacking, however, is the widespread merchant acceptance that is needed for more consumers to try, and then regularly use, Pay by Bank.
Younger consumers are in the driver’s seat:
According to our survey data, Pay by Bank usage is highest among 18-29 year olds, with 36% using Pay by Bank at least weekly. What’s noteworthy is that these younger consumers have growing spending power, and in sectors like online retail where that discretionary spending is being put to use, the margins are often razor-thin. In the highly competitive world of ecommerce the operational efficiencies and cost-savings of Pay by Bank can be the difference between being in the red or the black.
Although online retail is still seen as a huge opportunity because of the potential volume, adoption will take time. But in sectors such as financial services the traction is more evident. Demographics are important here too. Individuals, as they enter adulthood typically start to ‘consume’ a wider range of financial services and products. From online trading accounts and insurance to investment platforms, pension planning and personal finance. Younger generations as early adopters of new technology is a pattern that plays out over and over; there will be growing demand for Pay by Bank within the range of financial services platforms and tools that Gen Z are increasingly using.
Small screens now rule:
Mobile has overtaken desktop as the primary channel for shopping online – though the gap is not nearly as pronounced in Europe as it is across regions such as Africa and Asia. It’s a mobile-first world, and Pay by Bank is particularly well-suited to the form factor. Payment using only top-of-mind information, and authentication based on the user’s banking app and its automatic redirects reduces friction in the checkout process.
It’s not only online shopping that has moved to the small screen. We use our phones for an ever-expanding number of tasks and access to services; electric vehicle charging, charity donations, trading, ticketing and travel, parking apps and more. This is where some of the most interesting use cases for Pay by Bank are emerging, and I believe we’ll see a particularly strong fit in some emerging sectors.
Instant payments regulation and PSD3:
Open Banking can be used to deliver instant payments, which makes cashflow more predictable, and liquidity management easier for businesses. And alongside the cost of card processing, getting paid on time remains a major pain point for merchants.
The EU’s instant payments regulation is set to be enforced in 2025, which means that instant payments will be top-of-mind for payment service providers. The increased awareness around instant payments will help drive uptake of Pay by Bank solutions.
In the year ahead the industry will also be preparing for changes that will come with PSD3 and the PSR. We hope that the revised Payments Services Directive will mean a more harmonised approach to Open Banking. API performance is critical to a functioning Open Banking ecosystem – and too often the end-user experience still suffers.
