Open banking’s path to dominance in UK ecommerce

The number of people using open banking for ecommerce purchases is growing steadily. More than 1 in 9 people in the UK now use account-to-account transfers powered by open banking — Pay by bank —at checkout. There was an 88% increase in open banking payments in June 2023 compared to the previous year.

Open banking payments have clear benefits for both merchants and customers. But will they ever become the dominant payment method in the UK?

A panel at the 2024 ePay Summit discussed this question and explored what open banking providers and merchants can do to overcome barriers to adoption. The panel consisted of:

• Geoffrey Barraclough, founder of The Business of Payments

• Nadja Bennett, Strategic Accounts Director at TrueLayer

• Stuart McLay, Head of Retail at National Express

• Richard Brown, Fraud Analyst at Superdry

• Peter Lieck, Co-founder and CRO at Ivy

Read on for our highlights from that discussion.

Key takeaways

Breaking the 20-year habit of card payment depends on factors such as incentivisation, availability, ease of use and addressing generational differences.

Merchants will have to update their existing systems around chargebacks and disputes - working with open banking providers to provide peace of mind to their customers

A key benefit of open banking payments is the potential for cost savings. Providers need to maintain/further improve that cost effectiveness as adoption grows

It's time to end the 20-year card payment habit

“In Britain, we have a 20-year habit of paying for stuff on the internet by card,” says Geoffrey. When it comes to payments, he argues, people tend to stick to the same method they’ve always used and are comfortable with. How can merchants and open banking providers help break this 20-year habit?

Incentivisation works

Many of the panellists agreed on the power of adding incentives for customers to use open banking. “I’ve seen a slight change in consumer behaviours now because of things like cashback, points schemes and loyalty and rewards programs,” observes Richard. Merchants could link these to their own loyalty and rewards schemes to streamline the process.

With experience working with retailers in both the UK and mainland Europe, Peter has seen the effect of incentivising open banking payments. In Germany, for example, offering customers a discount when using an instant bank transfer has become commonplace. “I think that is very powerful, and I would love to see that happen more in the UK.”

Peter also mentioned using “soft incentives” or nudges, such as simply placing the Pay by bank option first in the payment methods list. From his experience, this simple action has seen open banking payments increase their checkout share two-fold.

If you build it, they will come

Nadja argues that merchants are often guilty of overemphasising consumer adoption. “A consumer can’t adopt something that isn’t in the checkout,” she says. Consumers never asked for Apple Pay or contactless pay, but these were adopted regardless. “[Consumers] don’t think about payments as much as we do,” says Nadja.

By simply adding a Pay by bank option to checkout, Nadja has seen cases where it automatically gets a 13% share of checkout, overtaking methods such as PayPal. Merchants like JamDoughnut are getting as much as 90% share for Pay by bank methods with incentives only marginally better than options like Apple Pay.

Ease of use

Stuart emphasises the importance of ease of use for the customer first and foremost. A payment method may involve plenty of complex work behind the scenes, but ultimately, none of this matters to the end user. “Their concern is to have a consistent and trusted payment method. They want to know that their money will be taken securely and effectively.”

Nadja reiterates this by pointing out how open banking can reduce friction. For example, customers don’t have to get up to fetch their card and find their CVV number or remember their PayPal login details.

Address generational differences

Consumer behaviour is constantly shifting, especially post-pandemic. But generational differences are still important to keep in mind.

Stuart has experienced this firsthand in his work with National Express. A large share of their customer base is older, and senior coach cards are their biggest seller.

Since Pay by bank methods largely function in tandem with banking apps, it’s important to understand the relationship older demographics have with new banking technology.

Merchants are excited about Pay by bank options, but cost is crucial

According to Stuart, simplifying the checkout process and removing friction for their customers are major priorities for National Express. They have been looking at open banking as a potential solution for the past year and a half.

Stuart believes that National Express will have a Pay by bank option in their checkout at some point in 2024. Excitement levels around open banking are pretty high — “eight out of ten.”

As a fraud analyst, Richard’s excitement is largely based on the potential of not having to deal with complex after-sales processes like disputes and chargebacks.

“

It offers a safer and quicker route for the customer, which will lead to less abandonment, hopefully. So it’s a better experience for the customer. But also a better experience for me as a fraud analyst and for Superdry since it won’t take up extra resources.

Richard Brown, Fraud Analyst at Superdry

Currently re-platforming their website, Superdry could be looking to add a Pay by bank option to their checkout process within the next six to twelve months.

However, both Richard and Stuart argued that open banking must remain competitive with cards on cost to win the embrace of merchants.“In theory, it should be a simpler process[...] so why should it cost more than a card transaction,” argues Richard.

The good news is that open banking providers can work with merchants to identify the right pricing model for them. For example, a business that revolves around high-value transactions could agree to a fixed fee per transaction model. Those with more variably-priced goods may instead opt to go ad valorem, with each transaction priced based on its total order value. It’s all about comparing the overall cost.

Open banking providers are working to improve consumer protections

Consumer and dispute protections for open banking payments are still forthcoming.Still, Nadja notes that Pay by bank options benefit from other robust protections that safeguard customers against payment failures and issues. For example, since open banking initiates transactions directly from the customer’s bank, it’s impossible for account information to be added incorrectly or intercepted by a third party. This can help reduce authorised push payment fraud and more.

The trickier part is when things go wrong with the purchase itself after the payment has been made successfully — goods aren’t delivered, the wrong product is sent or the item is damaged, for example. This is different from a payment failure as the issue stems from the goods and services the merchant provides.

In these cases, it is the merchants who are responsible for addressing the situation and not the banks. Nadja argues that the important thing here is for open banking providers to work with legitimate merchants capable of handling their own disputes. For instance, those who have strong customer service and effective processes around refunds, returns and complaints.

“Ask any merchant here, and they would agree that they would rather the consumer go to them first, giving them more control of the experience. This is better than if they run straight to their bank and trigger a chargeback,” she says.

The biggest gap currently is the issue of insolvency. What happens when a company goes bankrupt? What protection can open banking offer customers in these situations? Nadja says that in June, TrueLayer will publish a paper with recommendations on how to tackle this.

Will open banking ever take the top spot in the UK?

With open banking adoption rates growing steadily over the past few years, Nadja is hopeful that it could become the primary payment method in the UK by the early 2030s. She notes that a number of merchants have done away with card payment options altogether. Ultimately, “the ball is firmly in the court of the merchants. If they want to reap the rewards and they want their customers to reap the rewards, they just have to put it in their checkout.”

Richard believes Pay by bank could overtake cards if sold to the customer in the right way, citing the sudden popularity of methods like buy now pay later (BNPL). If open banking providers and merchants can somehow encapsulate some best practices from BNPL campaigns in the way they sell to customers, “it has potential in the next five to ten years.”

“I think there’s still work to do on the experience side of things,” says Stuart. “Digital wallets will probably outstrip cards first, then Pay by bank and other methods might follow suit. If the experience can be simplified, the future might be all about open banking.”

Interested in learning more about open banking? Contact the TrueLayer team now.