What is the future of ecommerce payments in Australia?
Open banking payments will challenge the dominance of cards in Australian online retail.
Open banking will offer a new way for ecommerce merchants to collect payments in Australia. Outside Australia, open banking payments are already challenging cards in markets where this secure infrastructure is operational, driven largely by ecommerce merchants' desperate need to solve some very serious problems. As a payments solution, open banking has been expanding rapidly in the UK and EU since the revised Payment Services Directive (PSD2) came into force on 13 January 2018.Growth in Europe has been spurred along by the rise of electronic payments generally as consumers discard cash, the parallel rise of online shopping accelerated by the pandemic, and the ongoing high costs to merchants of accepting card payments, according to TrueLayer's The future of ecommerce payments report.In Australia, the Federal Government has made a series of commitments to transform the payments system, recognising consumers’ growing preferences for smartphone technology and digital wallets – as well as open banking payments down the track – all of which will fundamentally improve the way ecommerce is done.
What are open banking payments?Open banking effectively simplifies online bank transfers by allowing the merchant to take the first steps and initiate a payment, which the customer then authorises. This avoids the negative friction of the customer having to enter details like a debit card number at checkout and, as a result, conversion is typically higher. It also removes the risks of human error and fraud inherent in a manual bank transfer that requires the customer to enter the amount, BSB, account number and reference, and reconciliation is so much smoother. Open banking payments are usually fast, as opposed to the 1-3 day wait that consumers often experience with large transactions, or when moving money into locations like share trading or investment accounts. The way it works is simple: the business makes an agreement with a third party provider such as TrueLayer to provide open banking services that, with the customer's consent and authentication, move funds from the customer’s bank account to the merchant’s.
Currently in Australia, this kind of payment isn't possible, because the government must make changes to the Consumer Data Right (CDR) legislation to allow 'action initiation' – the power for consumers to authorise an open banking provider to take an action on their behalf, such as making a payment.In December 2021, the Federal Government agreed to move forward with all of Scott Farrell's recommendations on action initiation, including payments, contained in his Future Directions report – as well as the majority of his recommendations in the Payments System Review. In 2022, there will be consultation, with a view to agreeing an implementation plan.
Personal and business paymentsThere are two main use cases for open banking payments (also known as 'instant bank transfers' or 'account-to-account' and 'A2A' payments). Peer-to-peer paymentsOpen banking enables a consumer to transfer funds to an account of their choosing, either belonging to themselves (‘me-to-me’ payments) or to someone else. The consumer can either enter the recipient’s account details directly into the open banking payment app, or select an existing account from a stored list on the app. This type of open banking payment is generally used for transfers between accounts rather than purchases.Consumer-to-business paymentsHere consumers pay online for goods and services directly from their bank account, instead of using a debit card. This type of open banking payment is growing rapidly in the UK and Europe. In mature markets like the UK, we might soon see open banking payments in point-of-sale (POS) transactions too.In this type of payment, an open banking provider such as TrueLayer has a contractual relationship with the business to enable it to receive open banking payments. When a consumer chooses open banking as the payment method at the online checkout, the open banking provider initiates the payment and, at the same time, is responsible for populating the business payee details in the payment order to the bank, rather than the consumer. This prevents human error and fraud.
Why are open banking payments challenging cards?As well as the rise of ecommerce and the decline of cash, regulatory reforms are also putting card payments under pressure. Regulators, such as the Reserve Bank of Australia (RBA) in its Review of Retail Payments Regulation in October 2021, are concerned about the "unreasonably high costs" of some card transactions. But it's the macro trends that are shifting the dial towards digital payments, as cash use fell by 10% in Australia in 2020 and the country's 8.9 billion debit card transactions in 2021 show how many people are already paying from their bank account, but could benefit from simpler, more secure payment rails like open banking.
Consumers and merchants benefit from open banking paymentsThe promise of the CDR is to give Australians choice, convenience and confidence in how they manage their money. And ecommerce merchants will win too. Open banking provides digital payments for the digital age. It reduces the number of parties to a transaction, increasing efficiency and speed, which we at TrueLayer have seen translate into improved customer satisfaction.Greater competition between open banking payments and card payments is likely to bring significant benefits to merchants and consumers. These benefits include:
- Lower merchant fees for accepting electronic payments.
- Reduced risk of unauthorised payments and fraud, thanks to embedded strong customer authentication (SCA) and pre-populated payment details.
- Increased convenience for consumers (and conversion rates for merchants) as a result of shorter payment journeys.
So how will we get there in Australia?Scott Farrell’s recommendations, agreed in December 2021 by the Federal Government, include:
- mandating the ePayments Code for payments licensees, which will further cement consumer protections
- creating a single, tiered licensing framework that replaces the need for applicants to engage with multiple regulators
- making regulation follow function by creating a defined list of payments functions and outlining which need to be regulated and which don't.
- Open banking payments for ecommerce require high levels of data compliance, allowing customers to trust the system, as they do cards.
- We know that it will take the banks time to enable open banking payments, just as it did with data sharing.
- Payments to merchants need to launch first – the main value of open banking payments is to shop online – not to pay your mates. Commencing payments initiation by merchants early will be the most effective way to launch open banking payments.
- Although open banking payments are fundamentally aligned with faster or instant payments, we would welcome the introduction of a rail agnostic system.
- An independent instructing layer enables technology companies to facilitate initiation of payments without handling the money. What this means is the messaging platform that tells the bank to send money to a merchant is not regulated as payments infrastructure. It means TrueLayer can send the instructions, but the payment goes through the normal payment rails – and unlike in the UK, direct debit should be included in these rails. It will allow innovation to move faster.
- We must have alignment with PayTo mandates.
- Consumers can permission Accredited Action Initiators, such as TrueLayer, to initiate variable recurring payments so open banking can compete with cards and direct debit.
- A single tier licensing framework that allows for reciprocal obligations between CDR accreditation and an Australian Financial Services Licence (AFSL) will make it easier for consistency and alignment between the CDR and other regulations.