Towards the first pan-European Open Banking based scheme
Imagine you’re taking an Uber at the airport, get to your destination and while you’re getting out of the Prius … ping… you receive a push notification from your bank that says € 32,78 was debited from your payment account. The full Uber experience, but no cards or wallets needed.
Maybe, an experience like this is what the EU law makers had in mind when they thought of PSD2 ‘Access to account’ (XS2A). However, one thing we know for sure, under the current regulation and interpretation, this is not what will happen in XS2A practice by default.
Strong Customer Authentication (SCA) requirements prevent a seamless user experience like in this Uber example. A setup like this would require exemptions from the SCA requirements (e.g. whitelisted beneficiary) in order to work.
But exempting SCA - the SCAthat was intended as a risk mitigating measure for banks in the first place - comes with… wait for it... yes, additional risk. But additional risk is usually avoided by banks and voluntarily accepting such risk is therefore only done in situations where the benefits outweigh this risk.
Traditionally in payments such benefits take the form of fees the bank collects for the service. On top of those fees, additional risk mitigation is often achieved through a certain liability shift that is contractually agreed upon.
In this example, where Uber would need to be able to initiate payments from the user’s current account directly and for variable amounts, without the need for a credit or debit card, there would be a need for a contract between Uber and the bank. This contract would enable Uber to have this feature rich integration with the bank, allowing the typical, seamless, Uber payment flow. The contract would also set fees for this service to be paid by Uber to the bank and would have Uber accept full liability for unjust collections from the user’s account.
Now that we know how this setup could work in practice, there’s only one hurdle. A hurdle that is not specific to this case by the way, but in fact relevant for almost every meaningful banking service. That hurdle is creating relevant reach to potential users.
Uber is used to working with only a few payment service providers, mostly Braintree. Such a payment service provider, in its turn, is used to working with payment schemes that each unlock millions of potential customers. Without any other arrangement, in our example, Uber or Braintree would need to connect to, and contract thousands of banks before this setup could reach a relevant user base and work on a pan-European scale.
It is for this reason that, in order to make this vision of seamless, Uber-like payments a reality, we need a new scheme. An Open Banking based scheme that offers these harmonised payment services on a pan-European scale and competes with card-schemes on reach, functionality and price.
Now the only question is, what consortium of banks is willing to start making this vision a reality?
Vincent Jansen is a Partner at INNOPAY
Note: since the reach argument is applicable to not only the seamless, Uber-like payments, but to all Open Banking services that operate in a 2-sided market (and a lot of them do), there’s probably a need for more Open Banking based schemes to deliver on the promise of Open Banking. We’ll explore this in future blogs, so keep posted.