GUEST COMMENT Charging back against margin erosion: how open banking account-to-account payments give retailers better control over cash flow and payments costs

Since PSD2 enabled the adoption of open banking in 2018, its uptake across all sectors has skyrocketed. Last year, Juniper revealed that the value of open banking-powered payments reached almost $4 billion in 2021 and by 2026, this is expected to exceed $116 billion – a growth rate of 2,800% in just five years. Open banking retail payments offer a win-win for online merchants and their customers. They lower costs, reduce fraud and increase conversions, while offering consumers greater choice, convenience and transparency at the point of purchase. 

Four years on from PSD2, it’s safe to say that open banking payments are challenging cards in the ecommerce world. The infrastructure underpinning this movement – API connections to banks, the ability to initiate and orchestrate payments, and the shopper checkout experience – has evolved at lightning speed. In the UK, the number of open banking payments has gone from five to six million in just six months.

So why are we seeing such speed in adoption? Whereas unlike other, more traditional payment methods, Open Banking offers customers a faster, more straightforward way to pay. Shoppers no longer have to enter their card number or CVV code. Instead, they use biometric information such as fingerprint or face ID when logging into their banking app and making a payment. This is done quickly and securely, with the added bonus of funds settling into the retailer’s account almost instantly. 

Simply put, merchants have waited too long for a viable alternative to cards. They need a faster, simpler, and more secure payment method that doesn’t come with high transaction fees, chargebacks, and slow settlement speeds, and Open Banking offers just this. With zero chargeback fees, faster settlement speeds, and with the added advantage of having a single point of access across all account to account territories, retailers are able to capture the attention of consumers with the seamless checkout experience that today’s hyper-connected consumer has come to expect. 

Fees – cards vs open banking payments

For merchants, one of the key challenges faced, and a continuous thorn to their side, has been the continued increase of interchange fees. Over the past several years, constant and significant increases in card fees by Mastercard and Visa have eaten into merchant revenues.

The average processing fee (the fee made up of acquirer markup, card scheme fee, and interchange fee) for credit card payments is currently 1.5% to 3.5%, and 1.75% for debit cards. The fees for open banking account-to-account payments, on the other hand, are significantly less – often sub 1% or a fixed price per transaction. 

Card fees are so much a heated topic that the UK’s Payment Systems Regulator (PSR) last year announced plans to carry out two market reviews focusing on card fees – one on scheme and processing fees, and the other on cross-border interchange fees. These reviews both focus on Visa and Mastercard, who, according to the PSR, have raised fees more than fivefold since 2014.  

These reviews are a welcome development in addressing the Mastercard/Visa duopoly. Existing card payment processes were designed in the 1950s, but today they are inflexible, expensive, and simply do not fit with the modern age ecommerce landscape and consumer expectations.

Speeding up settlements

With card payments, merchants often have to wait three to five business days for card transactions to reach their accounts. Whereas card processing will have three distinct processes; authorisation, settlement, and funding. Open banking, by the very nature of being near instant, offers greater cashflow control as a standard as it’s simply moving money from one account to another, without the need for any intermediaries. Retailers can therefore take full advantage of faster payment rails to settle transactions in seconds instead of days. 

Pushing back on chargebacks

Chargebacks have been and continue to be a significant issue in the retail space. When customers dispute debit or credit card payments, and submit their complaint to their bank or credit card provider for a payment reversal, the decision as to whether the customer can get a refund lies with the bank, not the retailer.  If the bank sides with the customer, which is the case more often than not, merchants not only have to pay the refund, but also get slapped with an additional fee for the bank’s troubles. 

Over the past several years, the rate of chargebacks for retailers has increased yearly by 20%, with 89% of chargebacks being probable cases of chargeback fraud, also known as ‘friendly fraud’. This, combined with the merchant’s ‘win’ rate scoring lower at 10%, is not only hugely costly for retailers but is also intensely admin-heavy. 

Open banking payments, on the other hand, are ‘chargeback free’. This doesn’t mean consumers don’t have the same protection. What it does mean, however, is that consumers will liaise directly with the merchant specifically if there is an issue, bringing the dispute in-house and the control back to the merchants. 

Consumers – what’s in it for them?

We’ve spoken about open banking payments being faster and easier for consumers, but what else do they offer in terms of functionality? First and foremost are refunds, which, from a regulatory standpoint, haven’t been mandated. In other words, it’s been up to third parties to build a fit-for-purpose open banking refund process. The ability to initiate open banking refunds not only gives customers the ability to receive their refund in a matter of seconds, as opposed to days. This next step in the progress of open banking is especially pertinent for fashion retailers, where refunds are significantly higher than in other sectors.

Stepping into the future with Open Banking

The adoption of open banking over the past few years has skyrocketed. As consumer demand shifts, retailers are under increasing pressure to deliver exceptional customer experiences across every channel in which they operate. From the moment the customer visits your website, or steps into your store, to when they arrive at the checkout, delivering a seamless and enjoyable experience will be what ensures that your customer continues to revisit your brand. When it comes to delivering on the payment experience, open banking payments deliver on all fronts. From almost-instant access to payments, to eradicating chargeback fees. It’s easy to see how open banking payments can be so powerful, and why they represent such a significant step forwards in the future of payments. 

Jordan Lawrence is co-founder and chief growth officer at Volt