Open Banking has been around for nearly 10 years in it's current form. Since the release of the 2nd Payment Services Directive (PSD2) in 2016, the financial sector has declared every year as the year of Open Banking. 9 years later we're still wondering when that's actually going to happen.
What is Open Banking?
Open Banking was created to increase competition and innovation in the banking sector, to allow new companies to challenge the existing big banks. It was also meant to allow the customer more control and insight into their financial transactions. Lastly, it was aimed at breaking the stranglehold that Visa and Mastercard have on payments, providing businesses with a cheaper, faster, more secure alternative to card payments.
What we know as Open Banking today, started in 2016 with PSD2, a set of regulations from the EU. PSD2 also included mandating Strong Customer Authentication (SCA), more commonly known as 3D Secure. This is when you confirm a payment or enter a code before money is taken from a card.
One of the major parts of PSD2 was the ability for payments to be made directly from a customers bank account, no card needed. A direct bank to bank payment, instant transfer with biometric authentication. In theory, it would stop a large amount of fraud that occurs with cards, such as cloning, social hacking and card testing.
When Open Banking first came around, no one really knew how to use it. It was mandated that banks had to support the new protocol, so adoption was relatively quick. A bunch of new apps sprung up that allowed you to connect all of your bank accounts into a single app, giving you insights into your purchase behaviour. You could see how much you were spending on food, days out, shopping, etc. Problem was that you needed to reconnect your bank accounts every 90 days. This meant there was a huge drop off of customers in those apps, most don't exist anymore.
Using Open Banking for payments
Open Banking has been continually pushed as the one size fits all answer to all of the banking sectors problems. The A-Team of the banking world, 'If you have a problem, if no one else can help, and if you can find them, maybe you can use Open Banking'.
The idea of Open Banking is a good one, providing a level playing field for everyone, encouraging new business and challenging the status quo. But there was one piece of the puzzle that was forgotten about, people.
Pretty much all online payments are made using a card, either debit or credit. In 2023 there were over 48 billion card payments. Technologies such as Apple and Google Pay have made it incredibly convenient, fast and easy to pay on websites. But there is a huge amount of fraud and the industry doesn't know how to combat it.
Paying with Open Banking allows you pay directly from your bank account to the merchants bank account, cutting out Visa and Mastercard entirely. This means money moves instantly, there's usually a 2 day delay in the merchant receiving the funds with card payments. The bank double checks that it is in fact the owner of the account that is making the payment. The customer doesn't have to enter any information or bank details. The idea of Open Banking payments is brilliant, genuinely, it's a great idea, but sadly it's been implemented incorrectly.
Paying by card online is pretty simple, you either enter your card details or tap Google/Apple Pay and stare at your phone and you're done. Paying via Open Banking isn't that simple.
With Open Banking you have to go through the following;
- Tap 'Pay' on the checkout
- Choose who you bank with from a list of banks. (You're bank may not be listed if the payment provider doesn't have a connection with them, in which case you can't use Open Banking)
- This will open your banking app on your phone. If you're on a laptop then it'll take you to your bank login
- You login to your app. Most of the time this is a simple biometric check or code login. On desktop, it's a completely different matter.
- Choose which account you want to pay with.
- You'll be shown the amount you need to pay, details of the merchant.
- You're shown a warning not to make a payment if you don't trust the person you are paying too.
- Check a box saying you confirm the recipient is legitimate
- Tap a button to confirm the payment, usually you have to login again or pass biometric login.
- The payment is processed and you're returned to the merchants app or website.
- Voila, job done.
Logically, it sounds absolutely fine, but in reality there's a number of issues.
What we found when we offered Open Banking Payments
At Collctiv we try, as much as we can, to make the process of contributing to a collection as simple, secure and as fast as possible. We believe that it doesn't matter who you choose to bank with you should be able to contribute and participate. We try to be as agnostic as possible with payments. So we offered Open Banking as an alternative payment method to cards.
This mean there were now 4 ways to contribute to a collection;
- Entering your card details
- Google Pay
- Apple Pay
- Open Banking
Open Banking was presented as a button labelled 'Pay By Bank'. We tried a number of other labels as well.
The experiment was run as a A/B test, whereby we offered our existing 3 payment options as a control, a variant with all 4 options and other variants with difference labels on the Open Banking button. We tested this with approx 100,000 sessions.
The results were pretty conclusive.
- Offering Open Banking had no impact on checkout conversion
- 0.91% of people initiated a payment via Open Banking
- 31% of those that initiated a payment via Open Banking completed the payment.
- 98% of initiated card payments successfully completed.
- 39% of those that initiated an Open Banking payment, cancelled and complete via card instead.
- 0.28% of successful payments was made via Open Banking
Just to note, we also ran additional experiments that helped inform the customer what 'Pay By Bank' was, this didn't change the results.
The data shows that no one wants to pay via Open Banking and of those that are inquisitive enough to try it, most don't complete the process.
But why? What's wrong with paying via Open Banking?
You bank may not be supported
Depending on who the payment gateway provider is, you may not be able to pay via Open Banking. Despite PSD2 being mandated and all the banks having to support the protocol, payment gateways have to establish a connection with the banks in order to process the payments. This takes time to negotiate and build, so your bank may not be available to use.
Every journey is different
This is one of the biggest issues. Who you bank with dictates your experience. Let's use Apple Pay as an example. With Apple Pay it doesn't matter who you bank with, when you come to pay the experience is identical, you tap the button, stare at your phone and job done. Every transaction has the exact same experience. With Open Banking it varies depending on who you bank with. Some experiences are better than others, Monzo, Starling and Revolut offer pretty good experiences, the UI is clean, informative and simple. The legacy banks, less so, they're more 'functional', corporate and legal in tone.
What this means for the merchant is that every one of their customers has a different experience. The merchant has zero control of the customer journey from when they tap 'Pay'. They have no insight into why customers fail to pay or anyway to improve the experience.
The language is terrifying
The more modern 'Neo' banks such as Monzo, Starling and Revolut tend to understand the importance of conveying financial jargon in a humanised way. However, some of the legacy banks haven't cottoned on to this. When you confirm a payment you have to accept terms and conditions, confirm that the merchant details are correct, maybe confirm that you acknowledge your data will be processed in accordance with X banks privacy notice. A lot of that language is written as if a lawyer wrote it, they probably did. It comes across as threatening and terrifying. Barclays, for example, show a 'Could this be a scam?' pop up before paying. I agree with the idea of educating a customer on potential scams but this places doubt in the minds of the customer and results in them not completing the payment. You have to confirm that you have read the scam information and want to proceed with the payment, this shifts liability to the customer if the payment was a scam, basically the bank is protecting themselves and not the customer.
No one knows what Open Banking is
Jane Bloggs on the street doesn't care about Open Banking and neither should they. They just want to pay for their goods quickly, safely and easily. There's no brand presence anywhere, so when you are offered the option to 'Pay by bank' no one knows what that means. Think about contactless payments, there's a brand mark for it and it's everywhere. Those four little curved lines that indicate contactless is supported is instantly recognisable on both the conscious and subconscious level. If you asked anyone outside of the financial sector what Open Banking is I doubt they would know.
Open Banking payments fails the so what test
You can pay by your bank account 🙌. So what? Why would I want to do that? I can pay in a second using my card, I have payment options with my card, doesn't using a debit card do the same thing? There's no reason for the customer to use Open Banking for payments, it's not more convenient, or quicker. Why should they use it?
No one wants to see their bank balance
This is an under estimated problem. People do not like looking at their bank balance and seeing how much they have in their account. You feel anxiety when you open your banking app, people deliberately avoid using their banking apps until pay day. Cards allow you to pay without seeing your bank account, pay by bank doesn't, in fact you have to deliberately select the account you want to pay from. One of the main reasons people use Collctiv is because the money is separated and they don't need to open their bank account to see payments. It's a genuine, big anxiety that people have, including myself, even if I know I have a healthy bank balance.
No consumer protection
Open Banking payments cannot be disputed, unlike card payments. If a product doesn't arrive and the merchant isn't playing ball, tough. If a product is damaged in transit and the merchant won't ship a replacement, tough. There is no consumer protection with Open Banking with one exception, APP or Authorised Push Payment fraud. APP fraud is when you are tricked into making a payment by a scammer. As of 7th October 2024 banks must now reimburse the payment, up to £85k, within 5 days.
Where does Open Banking work?
There are valid use cases for using Open Banking payments. For example, paying off your credit card bill, you open your credit card app, select pay, bounce to your bank app, confirm and job done. Or when you need to top up a wallet in an app, such as your Starbucks card. Starbucks currently use cards payments to do this, but Open Banking payments would be a good use case for this.
They work for a subset of merchants and on mobile apps only, not on the web and not on desktop.
How do we fix this?
In short, Apple & Google. Open Banking payments can be an over night success but doing one thing, adding it to Apple Pay. Provide the ability to 'Pay By Bank' in the same fashion as you can with a card and it'll be a success. The financial sector do not want Apple, or any tech giant, to have the ability and control, however, without it you won't get adoption.
If Open Banking was a startup, it would have gone bust years ago
In 2023 there were 130 million Open Banking payments made in the UK, compared to 48 billion card payments over the same period. That represents 0.2% of payments in 2023, 8 years after it's release and mandated adoption. If Open Banking was a startup, it would have gone bust years ago. Too much money has been spent on Open Banking, there's a real sunk cost fallacy issue that needs to be addressed.
Open Banking can work, but stop trying to make it work for everything, make it really good at one thing, design it for the customer and not for the banks. Open Banking has failed, but it doesn't have to, play to its strengths, admit that adoption isn't good enough, work with the tech companies and it has a real chance to take on Visa and Mastercard.