Innovation In Open Banking

It's getting easier to Pay By Bank

Oct 29, 2024

In May of this year I asked What’s Holding Back Open Banking?

I answered that Open Banking has been held back by a lack of focus on consumers.

Open Banking providers have spent too long focusing on the benefits for businesses. Rarely is the question asked: What’s in it for consumers?

With Open Banking, merchants pay lower fees than card payments, and they get faster, even instant, settlement of funds. There are no chargebacks.

This sounds great for merchants, but the first two points make no difference to consumers. The last - the loss of chargeback rights - is a negative for consumers.

Are the benefits clear for consumers? From What’s Holding Back Open Banking

In August, I followed up with Incentivising Open Banking. I asked: What incentives can merchants offer to get consumers into the habit of using Open Banking payments?

The answers I came up with were:

Offer A Discount At Checkout

In markets with relatively high interchange rates - such as the US - a targeted discount may help consumers opt for Pay By Bank. (I highlighted the example of The Information, which was providing a discount of $5 on a $399 subscription.)
The cost of accepting Pay By Bank should be significantly less than card payments. I say should as Stripe’s default pricing for card payments is 2.9% + 30¢ and what Stripe calls Instant Bank Payments are 2.6% + 30¢.
Therefore, today, in some cases, there’s not always such a big difference in costs. But as Pay By Bank volumes rise, merchants should be able to negotiate lower fees (as they can with card payments today).
In some countries, the costs for Pay By Bank amount to a fraction of those of card payments. This cost differential between Pay By Bank and cards will allow merchants and processors to collaborate on campaigns and incentives that take advantage of these cost savings and pass a portion back to the consumer.

There’s a $5 discount for using Pay By Bank - see the top right. This is originally from the post Incentivisng Open Banking

Offer A Discount For High-Value Transactions Only.

This is almost the same as above, but still worth mentioning.

In markets where interchange is much lower than in the US, there’s less scope for offering a discount, as there will be less of a differential between card fees and the cost of Pay By Bank.

To illustrate this point, consumer interchange for most transactions in the UK and EU is set at 0.2% for debit and 0.3% for credit, compared to an average of more than 2% in the US.

A study by Plaid found that consumers are more willing to use Pay By Bank for high-value transactions. A discount of 0.2% on a £5,000 transaction is a discount of £10, which is not huge, but it may be enough to push the customer to Pay By Bank.

Make It Easy.

Many of the most successful Pay By Bank systems make payments as easy as possible.

Norway and Sweden are great examples of this with their mobile payment apps, Vipps and Swish. For added security, these mobile wallets connect to their national BankID systems, which link a personal ID to a bank account. You can make payments by scanning a QR code at a business or scanning the QR code on someone else’s app. You can pay with a phone number or select a recipient from your phone’s address book.

Everything is about making payments easy, alongside bank-grade security.

This is a small merchant, a restaurant in Oslo, Norway. Their phone number is listed to receive payments directly from the Vipps app.

Incentivise Both Sides.

Successful payment systems need traction on the merchant side and on the consumer side.
Satispay got merchants interested by offering cheap pricing: free on transactions up to €10, and a flat €0.20 on transactions above this amount (for in-person payments).
On the consumer side, Satispay encouraged users to download their app by offering a €5 credit for the first transaction. It worked. Satispay has been successful.

There may also be other ways to incentivise consumers. Yet these three options - if we consider the first two to be more or less the same - are great starting points for considering how Pay By Bank can be incentivised.

Recently, I came across a graphic from venture capital firm Headline discussing their investment in Brite Payments. Headline mentioned what they call “consumer perks” regarding Open Banking. I’m not sure any of the points on the right-hand side will really be seen as benefits from the average consumer’s perspective.

One example, on the right side, “directly integrated into banks”, is something I see as both a strength and a weakness. Card payments come with a high degree of data security. There’s tokenisation, and the data security and eco-system centred around PCI DSS means that card payments are generally safe. There will always be some fraud with card payments, but Pay By Bank is not immune to similar issues.

Users have been deceived into transferring money to scammers through Authorised Push Payment (APP) fraud. Examples of this have been seen in the UK with parking scams. Strictly speaking, such scams don’t go via genuine Open Banking integrations, but for the general consumer, the nuances will not be apparent. The UK has recently brought in reimbursement requirements to protect consumers from APP fraud.

From a customer experience perspective, direct integration into banks can be both good and bad. I’ll explain why this is the case.

Variable Recurring Payments In Action

Pay By Bank often involves directing a user from a merchant’s payment page to a banking app to approve a transaction. After completing the transaction, the user is returned to the merchant. I’ve seen live implementations of Pay By Bank that feature many re-directs from the merchant’s checkout page to the consumer’s bank. I’ve even been left hanging on a blank page, unclear if my payment has been successful or not. Many payment providers try to avoid re-directs as much as possible. Staying within the merchant’s checkout environment improves the conversion rate.

One solution helping Pay By Bank need fewer redirects to a user’s banking app is Variable Recurring Payments - often referred to as VRPs. VRPs have been discussed for the past few years, but we have only recently started seeing live use cases at scale in the market. VRPs have often been described as similar to a direct debit or a recurring card payment. It was only from seeing VRPs in action that I could truly see how they work, and on some levels, they are more flexible than the other payment mechanisms mentioned above.

I came across VRPs when topping up my Revolut account from my Monzo account.

This is how it works. Let’s say you want to add £50 to your Revolut account from your Monzo account. Usually, you’ll be redirected from one app to the other to approve the payment, and then once completed, you’ll be redirected back to the original app. With a VRP, a user can approve an amount in excess of the immediate transfer.

For instance, with Revolut, I could approve a total monthly transfer limit with a limit on a single transaction value. This makes moving money between banking apps very easy. For neobanks, this is a perfect solution, as many users maintain a “legacy” bank account alongside a neobank account and regularly move money between them.

VRPs have multiple use cases, not only to move money between accounts owned by a single user. Now, there’s also what’s known as commercial VRPs, using VRPs to pay businesses. With an initial authorisation, multiple payments can then be made. These new use cases are now coming to market, making Open Banking payments as easy, if not more so, than card payments.

Summary: VRPs have taken a long time getting to market, but now they are here, they will be a valuable asset in increasing Open Banking adoption. When implemented correctly, the user experience can be faster and smoother than card payments. At the same time, the initial authorisation ensures that the process is secure. This builds on one of the initial points made earlier. Making it easy will be key for growing the takeup of Open Banking payments.

Pay With Revolut Pay and RevPoints

Revolut has been on a role. They finally got their UK banking license over the summer, and achieved a new valuation of £45bn via a secondary share sale. The latest valuation puts Revolut above the UK’s traditional banking giants such as Lloyds (£36.84bn), Barclays (£35.33bn) and Natwest (£31.22bn). Part of Revolut’s success is never standing still, and always bringing new products and features to market. Recently, Revolut unveiled its second payment terminal. The first offering, Revolut Reader, was focused on small businesses and launched in 2022. The device costs £49 and can operate all day on a single battery charge.

Revolut’s newest payment device, known as Revolut Terminal, is larger and with more functionality. As reported in City AM, a daily London-based financial news publication:

Fintech giant Revolut is stepping up its challenge to the likes of Square and SumUp with a new payment terminal for larger businesses and retailers. The London-based banking firm is set to roll out the device, called Revolut Terminal, in the UK and Ireland ahead of the busy festive season in a push to grow its business-to-business offering. Revolut’s merchant acquiring arm started launching products in 2021, offering both online and offline payment systems under its Revolut Business brand.

Much of the launch analysis centred on the look and feel of the payment terminal. Yet the most interesting aspects of the Revolut Terminal announcement are regarding Revolut Pay and RevPoints. The company is offering unique incentives for businesses and consumers to join the Revolut ecosystem.

The new terminal will provide merchants access to Revolut Pay, a checkout option allowing the fintech’s more than 45m global users to pay directly from the Revolut app. Through this method, customers are eligible to earn “RevPoints”, the firm’s loyalty reward scheme. Revolut Pay transactions will in turn offer merchants lower fees of 0.5 per cent plus £0.02.

Revolut users accumulate RevPoints from their day-to-day spending. Also, there are what Revolut calls challenges, such as completing a certain number of transactions during a set timeframe or referring a friend to Revolut. Completing these “challenges” leads to the awarding of RevPoints. RevPoints can be used in various ways, such as transferring RevPoints to airline partners for miles, for discounts at hotels via Revolut’s own accommodation booking platform, or even used for a discount at online merchants who offer Revolut Pay.

This is where it gets interesting.

Revolut Pay is Revolut’s own payment system, primarily for Revolut users, who can check out with a one-click checkout experience. Non-users can pay by entering their card details, but they are also prompted to sign up to Revolut with a referral offer if they do so. Until now, Revolut Pay was only available for online purchases, but with Revolut Terminal, users can now pay with Revolut Pay and use their RevPoints for in-person payments.

Revolut Pay can be enabled on a Stripe checkout in the UK

Revolut Pay is an excellent case in point of Revolut’s strategy of growing and expanding on both the consumer and the business side. To get a Revolut Terminal, you must be a Pro (freelancer) or a Business account holder. There’s an incentive to accept Revolut Pay. Fees are cheaper than card transactions - 0.5% + £0.02 for Revolut Pay as opposed to 0.8% + £0.02 for domestic card payments. Revolut users can pay straight from their account with a closed-loop bank-to-bank payment and use their RevPoints to get a discount at any merchant that offers Revolut Pay.

How Revolut Terminal incentivises both side - consumers and businesses…

Summary: This is a strong example of how both sides, business and consumers, can be incentivised to use direct bank payments. In this case, the benefits of lower fees for businesses and the potential for discounts on the consumer side can help keep users within Revolut’s own eco-system. Given that you need a Revolut business account to get a Revolut Terminal, from a competition lens, this goes wider than just payments. Businesses may opt for a Revolut Business account as their business bank account so they can offer Revolut Terminal.

Instant Bank Payments Via Link (Stripe)

Stripe’s Link is a fast checkout solution. Similar solutions include the recently launched Fastlane by PayPal, Shop Pay from Spotify, and Mastercard’s Click to Pay. (I wrote about Click to Pay in more detail earlier this year.) With Link, the premise is simple: any merchant that uses Stripe can benefit from cardholders who have added their details to Link across the Stripe network. Card details are tokenised and stored securely, but an SMS verification process is required if a customer uses Link on a new site or device. In reality, this verification process happens less than expected, especially as many of us shop with fewer merchants than we may think.

From the merchant perspective, Link leads to a 3x faster checkout experience for users and increases conversion by an average of 14% (according to Stripe). So far, Link has just been using card rails, but now Stripe is offering Instant Bank Payments across the Link network:

With Instant Bank Payments, your customers can check out with Link and pay with their US bank account in just a few clicks. Payments are then confirmed instantly and settle in two business days—just like card payments—and Stripe guarantees the risk of bank-initiated returns. In addition, Instant Bank Payments are priced at 2.6% + 30¢ per successful charge, a discount to cards. This has allowed businesses such as Uber and Anthropologie to benefit from the cost savings of bank payments without having to manage the delayed confirmation time and risk of failed bank payments that are traditionally associated with ACH.

Early data shows that 85% of customers who use Instant Bank Payments with Link make repeat purchases this way. While this feature is only available in the US so far, Stripe is likely to roll out a similar feature for other markets in the future. Other one-click checkout providers may now be considering whether Pay By Bank should also be part of their offering.

Summary: Given that the actual costs of Instant Bank Payments are much lower than card payments, it’s likely that we’ll see more attempts by merchants and payment providers to incentivise users to try the Pay By Bank payment rails. Expect to see more attempts to incentivise customers to go down this route, and a one-click checkout experience could be a great way to do this.

Adjacent Innovations

Wero is a pan-European payments wallet that runs on the SEPA (Single European Payments Area) instant payment rails. Jeremy Light has recently published a deep dive on Wero that is worth reading. The key point is that Wero brings together members, primarily banks, from Belgium, France, Germany and the Netherlands. Significantly, some of these countries have successful digital wallet schemes (these can exist as separate apps or within mobile banking apps).

One of the big success stories in European mobile wallets can be found in the Netherlands, where the value of transactions that go through the iDEAL mobile wallet is 81% of the value of card payments. iDEAL was acquired by Wero’s parent company in October 2023 and will move to Wero in 2026. At this time Wero is live in Germany, with more countries to follow in the coming months. Although there have been some initial teething problems, over the long term, Wero has a strong chance of success, given the foundations they are building on.

Ansa is a US based start-up with a simple core concept. Ansa allows brands to create their own stored-value closed-loop wallet - think of enabling any merchant to create something akin to the Starbucks Rewards scheme. (Starbucks Rewards has led commentators to speculate if Starbucks is actually a bank, due to the level of customer “deposits” it accumulates within its platform.) With Ansa, businesses can brand their stored-value wallet, and users can add it to Apple Pay or Google Pay wallets.

Ansa Everywhere allows for NFC payments with a merchant branded wallet - source

Ansa recently announced a partnership with Open Banking provider Plaid to allow customers to add to their stored value cards directly from their bank account. Part of Ansa’s business model is working with merchants to build loyalty programmes. By saving on card fees on the top-up of the digital wallet, there are opportunities to provide customer incentives. As the CEO of Ansa, Sophia Goldberg states:

By bringing ACH funding to their digital wallets, we're offering even greater opportunities for cost savings and customer engagement. Rather than a brand processing a $5 credit card, they can process a $25 wallet load on pay by bank and add a $5 incentive, driving cash flow and revenue for the brand, and creating even deeper loyalty with their customers

At the same time, Ansa allows for payments via Apple Pay or Google Pay at the POS. But this means a card payment, and with card payments, interchange fees will be incurred at the checkout stage. The next step would be integrating instant bank payments into the checkout flow even when NFC is used. Using NFC to trigger an instant bank payment is now becoming possible as Apple has started to open up its NFC capability more widely. However, it will likely need a partnership with another payment provider for Ansa to make this a reality.

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Notes: In this post, I often use Open Banking and Pay By Bank interchangeably.

The term A2A or Account-to-Account payments is also widely used as a synonym in this space. These terms are not strictly the same as Open Banking, as Open Banking is a broader concept that denotes the ability to use APIs to access data as well as payments.

In the context of this post, all terms can be understood as the ability to pay from one bank account to another instead of a card payment.

In some examples, I’ve also mentioned payments from mobile wallets or a stored-value card rather than directly from a bank account. Solutions like Wero can exist within a mobile banking app alongside other functionality or as its own app.

Open Banking operates hand-in-hand with local payment rails, usually instant payment rails. For instance, FPS (Faster Payments) is usually used in the UK, and SEPA SCT Inst (SEPA Instant Credit Transfer) is used in Europe.