More and more people are ready to join the cryptocurrency bandwagon. But not if buying them remains complex and murky. Step forward open banking to ramp up adoption.
Over the last five years, Bitcoin’s value has gone up by around 5000% and Etherum by almost 32,000% (source: Statistica). Together, these two currencies have a market cap of over $1 trillion. Cryptos are no longer for the fringe players and the thrill seekers.
But the industry has some challenges to overcome before it becomes truly mainstream, because getting onboard is not as easy as it should be. To buy crypto — known as ‘on-ramping’ — most exchanges only take card payments or manual bank transfers.
The former is clunky and prone to fraud, not to mention costly for an exchange to process. A card payment also takes time to settle – up to five days. In the meantime, the exchange could find the price of the currency has surged, leaving them out of pocket.
Traditional bank transfers are more secure and funds may settle faster, but the payment experience is poor and they’re difficult to scale.
Going digitally native
The issue is that crypto exchanges have been forced to adopt predominant payment methods like cards to allow customers to buy or sell crypto, but these payment methods were designed for in-person transactions.
Step in open banking, a payment infrastructure created for the digital world. The UK has led the charge so far in adopting open banking, with much of Europe in hot pursuit. Other countries are watching with interest.
Unencumbered by legacy, open banking payments are faster and more convenient for users, better at protecting against fraud, and less costly for businesses. As crypto investors become familiar with the benefits of open banking, they will seek out the platforms that offer it. Those that don’t could find themselves losing ground.
One major exchange that understands this opportunity to gain a competitive advantage is Gemini. Blair Halliday, who heads up their UK market, describes open banking payments as:
A Holy Grail... our customers want to use their bank accounts to transfer money directly, from within our site.
This trend towards open banking is not unique to crypto exchanges, which points to a deeper and more sustainable shift in consumer preference. Open banking is being adopted quickly in other trading and investment markets. Among TrueLayer customers, we’re seeing around two thirds of end-users choose open banking, even when they also have a choice of Apple Pay and Google Pay.
Two reasons for this impressive uptake are trust and ease. With open banking, when someone comes to make a payment, they are briefly redirected to their bank’s site at checkout – an environment they will trust more than an unfamiliar third-party – and automatically brought back again.
Ease comes in the form of the authentication process. In Europe, most payments now are subject to Strong Customer Authentication (SCA) protocols for better security, which can inject significant friction into the experience – often requiring consumers to confirm their identity in multiple ways. But with open banking in markets like the UK, the customer confirms their identity via their bank’s app with their fingerprint or by face recognition. It matches the gold standard of user experience set by Apple Pay and Google Pay and also meets SCA standards.
Letting customers pay in the way they want is not the only win for crypto exchanges. With open banking payments (and unlike cards) settlement is immediate. This means two things. First, an investor’s money can be put to work straight away. And secondly, it means exchanges no longer need to provide a pre-funding service (ie. buying the cryptocurrency in anticipation of receiving their customer’s money), and so they significantly reduce their liquidity risk.
The other win for crypto exchanges is efficiency. When it comes to processing manual bank transfers, exchanges need the reconciliation manpower on the back end, as well as sufficient customer support to deal with misplaced transfers, which happen when customers key in details incorrectly. With open banking payments, these details are prepopulated, so mistakes don’t happen in the first place.
Costs are also kept down. Benoit Marzouk, CEO of Bitcoin Point, estimates that an open banking payment is between 70-80% less expensive to process than cards:
Using open banking instead of cards allows us to maintain a very competitive fee
No more shared secrets
A look into how an open banking payment works illustrates its superior security credentials.
Open banking uses single-use access tokens and an industry standard API (known as FAPI – Financial-grade API) to connect the payer with their bank, authorise them and their transaction amount, and transfer the funds. It is inherently more secure than cards, as no information is shared. Compare that with a card payment – where the customer needs to send their card details and personal information across the internet. With open banking, there are no more shared secrets.
Security is also enhanced because the customer is logging in directly with their bank, meaning authentication is built in from the ground up.
That helps keep the regulators on side too. Depending on what jurisdiction they are operating in, crypto exchanges will need to comply with a range of laws, including AML (Anti-Money Laundering) and KYC (Know Your Customer). Though open banking does not eradicate all possibility of fraud, it makes it easier for exchanges to prove the source of funds coming onto the platform.
In turn, that should encourage more banks to allow open banking payments to trusted crypto exchanges. Those banks that retain a hard line on transfers to all crypto firms may end up losing market share “as customers move to more crypto-friendly banks,” says Benoit.
Ultimately, banks will be swayed by customer demand. Card payments and bank transfers may remain the most popular way to transfer funds into crypto exchanges for now, but that is set to change.
As the benefits of open banking payments become clear, we’ll see more and more take-up among traders and crypto exchanges. And all parties will look for more ways that open banking can support them, such as to make withdrawals from crypto exchanges back to a bank account.
Indeed, in mature open banking markets, there now seems real impetus to adoption. At TrueLayer we’re already working with crypto brands like Coinbase, Ziglu, Swaps.app, BitcoinPoint, Luno and MoonPay. Once they see users make their first open banking payment, they don’t go back, and they’re going to take everyone else with them.
This article was drawn from a panel discussion hosted by The Block. The panellists were: Blair Haliday, Head of UK at Gemini, Matt Parish, Senior Product Manager at TrueLayer and Benoit Marzouk, CEO of BitcoinPoint. Watch the on-demand recording.