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Does Open Banking mean the end of card payments?

The first generally useful application of Open Banking is here in the UK. While it will be some time yet before it gets much use, new organisations soon will be able to initiate payments between bank accounts on a consumer’s behalf. This creates a new layer between consumers and banks, hopefully spawning novel ideas and services. Moving the centre of payments away from banks though causes significant shifts in the market, and could well affect the dynamic around banks’ payment card cash cow.

Any authorised organisation can now make payments; it doesn’t need to be a bank. That’s already the case with cards you might think. But cards are expensive for a company to process. Alternative systems such as Direct Debit (account to account transactions) are often much cheaper, especially when a payment is recurring, but for non-recurring payments Direct Debit is not ideal. What is a payment card fundamentally though? It’s just a token that along with a PIN or signature, identifies a payer and payment source. With Open Banking, that token is your bank details, nothing physical needed, along with the authentication mechanism (likely to be through a phone) chosen by the account-owning bank.

If a company uses Open Banking APIs to process payments instead of cards, it could save a lot of money, both because there is no physical token needed, and because there will be a lot more competition; the barrier to entry is lower by design.

Big online retail organisations will be doing this already. They process a huge number of card payments. If they could bypass both the cost (from the card processors) and effort (following up expired cards, fraudulent cards etc.) by processing account-to-account, they would do it. It would be so much easier to store bank account records than credit cards from a compliance perspective too (though I think that will change). Of course we’ve made an assumption here: Open Banking transactions will have a similar saving on credit cards that Direct Debit does. There’s nothing to suggest that this will not be the case so far, but banks will not want to lose these margins and will be looking very creatively at ways to keep them.

This leads us to the sensationalist title of this article. We will soon have a payment mechanism that needs no physical token or infrastructure (using an authenticator that most people carry with them), is cheaper through greater competition and uses the bank account itself directly as the payment source. It will take quite some time to change, but what is the point of payment cards then? Outside of niche use cases such as going on holiday to other countries, pre-paid loaded cards or situations where you need a physical token, cards seem like a payment hack that have had their time.

Chip and pin became mandatory in the UK twelve years ago. There are adults now who have never seen a credit card pushed through the carbon roller mechanism that existed before chip and pin. Changes of convenience become normalised very quickly. We may soon see a time where physical payment cards are looked at in the same way we look at audio cassettes today. I for one miss cassettes; who will say the same for payment cards?

Comments: (4)

Stephen Baines
Stephen Baines - Ex Tesco - Stevenage 26 March, 2018, 20:38Be the first to give this comment the thumbs up 0 likes

I can see Open Banking replacing Debit cards but not necessarily Credit cards. Customers might still prefer all monthly spending to be rounded up and settled monthly with the option of taking easy credit if required.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 27 March, 2018, 11:48Be the first to give this comment the thumbs up 0 likes

Credit card has been around for 50+ years. During this period, many wannabe credit card killer alternatives have sprouted up e.g. Account-to-Account EFTs (e.g. FPS, NEFT, PayM, Venmo, Dwolla), GenY Mobile Payments (e.g. Boku, Zong), Pay Later Payments (e.g. Bill Me Later, Klarna), etc. However, none of them has spelled the end of credit card payments. In fact, some of them have died by now and others have had to pivot from Alternate / TELCO to credit card rails to ensure their own survival.

I've long attributed the lackluster performance of these alternative payments to a combination of their weak value proposition and disadvantages for existing credit card users viz. no rewards, no deferred payment, zero fraud protection, exposure of bank account, non-repudiation, lack of merchant receipt, etc. Offering a lower MDR to merchants alone is not sufficient to dislodge a strong incumbent like credit card (and some alternative payments like GenY Mobile Payments didn't even do that). 

The ability of Open Banking payment products to dent credit card payments in any significant manner depends largely on how they overcome the downsides of their alternative payment predecessors.

Andy Brown
Andy Brown - NCR - London 28 March, 2018, 08:58Be the first to give this comment the thumbs up 0 likes

Gavin, I agree with you comments for online purchases where keying in bank account number is no different to entering a card number.  But in-store (where the bulk of transactions occur) is more challenging until banks provide account numbers in a wallet on the mobile - but maybe a fintech will provide that as a service for retailers?

Responding to Stephen's comment about credit cards, in Europe only the UK is the significant credit card user base so less impact elsewhere.

Ketharaman, the big difference to other mechanisms you have quoted is that customers have to set up another payments vehicle and fund it.  The advantage of open banking and using the current account is the consumer already has this set up.  So easy for them to adopt.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 28 March, 2018, 10:34Be the first to give this comment the thumbs up 0 likes

@AndyBrown: There's no need to fund - i.e. prefund - FPS, NEFT, Boku, Zong, etc. All these Methods of Payments pull out money from current account on the fly. Not sure if and why you believe otherwise. As for setting up a payment vehicle, (a) Paying by one Open Banking product and not another will require some amount of setting up of the former (b) The other MOPs are incumbent and already enjoy adoption. Even if setting up of an Open Banking product requires less effort than setting up of incumbent MOPs, the latter is a sunk effort, so the challenge for Open Banking product is to provide enough reason for consumers to ditch the incumbent MOPs. Greater ease of adoption of Open Banking products - assuming it's true - is not very relevant. 

Gavin Scruby

Gavin Scruby

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