Will 2022 Spell the End of Traditional Credit Card Payments?
The winners in the open banking space will be those with innovative products that are underpinned by smart privacy implementations and spurred on by open banking's geographical spread.
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Is this the year we begin to say goodbye to card payments? Will account-to-account (A2A) payments replace them? According to headlines, the answer to these questions could be yes.
But the established payment networks are just that: established. Rules surrounding them are universal and well-understood; the customer journey has been honed over decades.
Nonetheless, card payments come with flaws. Manual data entry reduces convenience and fraud is an ever-present threat. The open banking A2A opportunity is undeniable: it's predicted that the value of open banking payments will exceed $116 billion globally in 2026, from just under $4 billion in 2021—a 2,800 percent increase.
So, how do we get there? And what comes next?
Data privacy consciousness to grow GDPR confidence.
Many companies in the European Union are still concerned about General Data Protection Regulation (GDPR). As a result, they're blocking themselves from sharing data and the benefits of open banking.
The winners in the open banking space will be those with the leanest, smartest implementations of GDPR: those that make the transfer of personal information transparent and auditable, ensuring consumers retain access to their data and are able to revoke consents.
Data use raises questions about control and privacy. Adequate consumer protection is not yet in place and a more proactive approach needs to be taken. At the same time, more financial services firms will open their platforms to open APIs, leading to business types we have not yet seen.
Now that the foundations have been laid for open banking infrastructure, the payments space race is on in 2022, to see who can "productise" best and fastest, with pole position taken by those with a finely tuned data strategy.
2022 the prologue for VRPs, 2023 the climax.
This year, the potential of variable recurring payments (VRPs) will become apparent. They essentially have the potential to replace "card on file" and direct debits.
The story of VRPs is illustrative, as merchants are yet to embrace this "Holy Grail." They need solid business reasons to adopt. Crucially, these already exist but are not necessarily well-known: real-time settlements, lower costs, and the elimination of card fraud, plus reduced customer churn and a lack of chargebacks.
While the biggest UK banks are building the infrastructure for VRP – initially between accounts in the same name – most banks are not ready for full implementation, and regulatory deadlines have been pushed back.
Also still pending is regulation to clarify consumer protection and liability. Think of it from banks' point-of-view: there are plenty of costs associated with VRP and – at this stage – no clear revenue streams. Instead, there is a risk VRPs will cannibalise other income, notably interchange fees.
Still, VRPs pave the path for one-click payments, providing banks a chance to create ways to monetise open banking. To make VRPs mainstream, more work is needed on the practical and financial implications.
That is happening: working groups are tackling consumer protection; attractive price differentials are being created for merchants; and enhancements to user experience are in development.
In 2021, these benefits were tested in the world's first VRP Hackathon, where more than 100 participants experimented with VRP use cases. What's more, banks are developing premium APIs that mimic interchange and compensate for lost revenue streams.
We believe that 2023 will be the true "year of the VRP," with 2022 proving a fascinating prologue.
Going global: changing centres of gravity.
The UK has traditionally been the forerunner in open banking – but its dominance is about to be challenged.
It's reasonable to expect far more real-time payments across Europe in 2022 – most notably in Eastern Europe, set to be a prime link for pan-European connectivity. While local bank transfer schemes, such as BLIK, have been hugely successful over the past few years, most hyped EU open banking startups are only now reaching rollout readiness for Eastern Europe. The banking landscape is quite advanced and the payments space is already highly competitive.
Innovation will also come out of Latin America (LatAm), where alternative payment methods, such as wallet vouchers are already in use. LatAm boasts a younger age profile than developed markets but higher average incomes than south Asia. Meanwhile in Asia-Pacific countries are building a real-time payments corridor and progress is accelerating rapidly.
This geographic shift may prove one of the biggest changes of all in 2022. There is a trend away from the open standards that dominated the early years of open banking, toward more centrally governed networks. The world is becoming multipolar, with distributed systems that are harder to disrupt, and interbank clearing systems shifting to real-time.
Stricter standards, policies, and transparency to accelerate adoption.
Doing the basics well is more important than brandishing shiny promises of a brave new world.
A2A payments will continue to disrupt the payments landscape over the next 12 months. There will be a stronger bottom-up push from technical service providers (TSPs) and third-party payment service providers (TPPs), which will highlight when implementation goals and regulatory requirements are missed.
This transparency will give regulators better enforcement powers, especially among Payment Initiation Service Providers (PISPs). In turn, this will drive greater adoption among merchants and consumers, newly motivated by the security, visibility, and control inherent in A2A payments.
Ultimately, the winners in the open banking space will be those with innovative products, underpinned by smart GDPR implementations – spurred on by open banking's geographical spread. 2022 has the potential to deliver all this.