December 01, 2021

The top ways e-commerce merchants profit from Open Banking payments

Richard Kotite

Open Banking payments represent an exciting new opportunity for European e-commerce businesses. Instead of receiving payment by credit or debit card, merchants accepting Open Banking payments receive payment directly from a consumer’s bank or payment account. As a result, merchants gain a more secure and efficient method of accepting payments. Open Banking payments also reduce transaction costs and the risk of fraud, while digital-first consumers enjoy a streamlined checkout process, paying directly from their bank accounts. Online merchants accepting Open Banking payments are increasing conversion rates amongst a fast growing segment of their customers, with significant impact on their economics. 

This article looks at the growing number of merchants integrating Open Banking payments and how they’re benefitting. Juniper Research estimates the global value of Open Banking payments will exceed $116bn by 2026, up from $4bn in 2021, while over 75% of these users will be European. In the UK, Open Banking payments have grown nearly 500% in the last twelve months, reaching 2.6 million transactions in September, 2021. 

The chart above displays the rise in successful payment initiations in the UK.

Merchants reduce transaction cost and virtually eliminate fraud risk

Open Banking payments were built for the digital economy so the entire payment process is designed to lower costs, reduce fraud and create a better digital experience for merchants and consumers. 

Card payments were born for the physical world with numerous entities: gateways, acquiring banks, issuing banks, PSPs, and schemes involved in processing a payment with merchants. Open Banking was built for the digital economy and excludes many of the payment intermediaries that exist to manage payment risk and liquidity as well as their associated costs. 

PISPs (Payments Initiation Service Providers) like Plaid allow the account holder's bank to send payments directly to the merchant's bank on top of effective, extremely low cost rails such as Faster Payments, SEPA and SEPA Instant. Because Open Banking payments are instantly deposited into the merchant’s account, there is no risk of non-payment and no intermediary. As Open Banking scales, merchants can start to effectively unlock these structurally low cost rails for e-commerce transactions. 

Any merchants with significant online payment transactions can improve their economics by converting their customers to Open Banking payments,  away from cards. However, merchants with high average transaction values (ATVs), lower gross margins and/or high propensity of chargebacks/refunds (e.g. hospitality & travel), or a higher risk of fraud are likely to benefit the most from receiving payments via Open Banking. Let’s note that transactions up to £250,000 are supported by Faster Payments, enabling innovative payment journeys for even the largest purchases. 

Many e-commerce companies deal with thin margins, so chargeback expenses can really impact their bottom line. These sellers can lower the risk of fraud and eliminate chargebacks with Open Banking payments. Eliminating chargeback fees alone, which range from £5 to £15, can significantly increase profits. Overall risk is reduced dramatically because payment happens instantly, no confidential information or Personally Identifiable Information (PII) is shared, and the latest SCA technology is leveraged. 

Fraud is another significant risk for merchants given that global e-commerce fraud grew 18% between 2020 and 2021 and now exceeds $20bn. Open Banking payments reduce the risk of unauthorised payments by authenticating accounts and payments directly with a consumer’s bank. Consumers never share credit cards, bank credentials, or other confidential information with a third party. Users authenticate directly with their bank using their face, fingerprint or other secure authentication method. SCA (Strong Customer Authentication) is built into the payment flow, making fraud more difficult. 

Open banking payments are designed and optimized for the online age 

Native SCA: There is now evidence that consumers prefer the seamless Open Banking payment flow which requires fewer steps because it natively integrates SCA. Consumers often just need to share a facial image or fingerprint to authenticate, access their bank account, and confirm payment. This native Open Banking SCA journey differs from traditional online card transactions which leverage SCA, as it’s significantly shorter and is optimised for conversion (via App2App and other customer experiences).

Flexibility with multichannel merchants: Whilst most of the dialogue around Open Banking focuses on mobile online journeys, brick and mortar merchants can also take advantage of Open Banking. Through the use of QR codes (made ubiquitous during COVID) a customer can authenticate and authorise a transaction on their mobile device with a few simple clicks. So if a consumer is buying a flight directly at an airport kiosk, all they need to scan is an Open Banking enabled QR code and they’ll be able to complete the transaction without the need of going through an online checkout experience. Plaid strongly believes this multi-channel use of Open Banking is only just around the corner.

Consumers prefer a seamless payment experience, increasing conversion rates

Conversion is critical for any checkout experience. Open Banking payments match and even surpass the conversion rates for numerous payment methods including cards+3-D Secure through a faster and easier experience. This is especially the case with the native mobile Open Banking experience in the UK where conversion rates for Plaid’s customers approach upwards of 75-85%. This is due to the use of App2App redirects, a 2-3 click process for end-users and the use of FaceID / fingerprint scanning for seamless strong SCA. This market leading conversion combined with Plaid’s extremely reliable global infrastructure - monthly service uptime percentage greater than 99.96% - offers merchants a strong technical bedrock to drive more seamless payment experiences and ultimately boost revenue.

Instant settlement leads to vastly improved liquidity cycles for both merchants and consumers 

Credit card transactions can take days to settle, especially harming smaller merchants who may not have access to short-term liquidity. Open Banking solves this problem by allowing merchants who value speed of funds to take advantage of Faster Payment rails in the UK and other instant payment rails in Europe (e.g., SEPA Instant) to settle transactions. 

E-commerce businesses with high merchandise return rates can offer faster refunds. Consider a consumer who buys two outfits in different sizes and returns one. They might wait several days for the refund to hit their credit card account. Instead, merchants can delight their customers with virtually instant refunds when they use Open Banking payments. 

Adoption rates are surpassing 20%

Merchants implementing Open Banking payments deliver a better consumer experience, reduce fraud, and improve their earnings. 

The impact of all these structural benefits is clear. Plaid has found that when Open Banking payments are introduced as a funding or payment option, they very quickly become 20% of total payment volume. As adoption for Open Banking continues to expand we expect more merchants to recognize the advantage of this payment option.

How can Plaid help?

Plaid powers Open Banking payments by working directly with merchants and in partnership with PSPs. 

Some merchants & PSPs need additional functionality for their Open Banking payments. Plaid’s payment lifecycle products can help with the ability to verify and reconcile payments and seamlessly process instant refunds and payouts. We will be sharing more about these new capabilities soon!

Wherever you are on your Open Banking payments journey, Plaid can help. Contact our sales team to learn more. Access our Payment Initiation product overview and documentation for more information.