Banking in the EU changed forever in 2020, when we had to gain compliance for the EU’s 2nd Payment Service Directive (PSD2). PSD2 focused on consumer security and transparency. A large part of the compliance effort was PSD2’s Secure Customer Authentication requirement, which mandated that most EU consumer-initiated transactions be processed through an EU acquirer and be double-authenticated. However, PSD2 also removed the friction from the banking network, putting businesses and consumers in the driver’s seat when it came to moving money and ushering in “open banking.”
This month, we take a deep dive into what open banking is, and how it impacts us all as we accelerate in the payments fast lane.
With open banking, payments can easily be sent through bank transfers, bypassing the card networks and the high fees often associated with card processing.
Open Banking Opens Doors
Open banking is a mandate that creates a more competitive marketplace by transferring control of consumer data, from banks to consumers and a wider range of third-party payment service providers. This gives consumers the option of deciding how to access their own banking data and how it’s shared.
With open banking, you can increase account-to-account payment solutions. In the U.S., these applications are linked to payment service solutions like Zelle and Venmo. The regulation also opens the door for new third-party providers like Payment Initiation Service Providers (PISPs), which initiate bank transfers, and Account Information Services Providers (AISPs) which are allowed to access consumer financial and other data. PISPs and AISPs help make the movement of money between banking networks more efficient for the consumer.
With open banking, payments can easily be sent through bank transfers, bypassing the card networks and the high fees often associated with card processing. The policy has also led to new payment solutions that ecommerce merchants can take advantage of. Open banking is recognized globally, even where there isn’t a government mandate in place.
The Push and Pull of SEPA Instant Credit
Open banking now allows Single Euro Payment Area (SEPA) instant credit and direct debit transfer to anywhere in the EU. SEPA was Europe’s first instant bank transfer scheme and when it was initially rolled out in 2017, it could only be used by banks. With PSD2’s open banking mandate, all that changed, and SEPA payments are now readily available using third-party providers, which merchants can offer to consumers as a payment option.
There are two flavors of SEPA payments options to be aware of: SEPA debit and SEPA credit.
SEPA debit is considered a pull payment initiated by the merchant. For example, a consumer provides a mandate that enables the merchant to pull a one-time payment, or it can be a recurring payment. There are fraud controls in place to support this payment type but there is still the chance of a revoke or chargeback. SEPA debit is a great solution for membership programs.
SEPA credit transfer is considered a push payment initiated by the consumer for a purchase. The SEPA credit transfer can only be used for a one-time purchase. SEPA credit transfer is a great option for cam sites when purchasing tokens or a one-time purchase on a membership site. There are no chargebacks or revokes associated with a SEPA credit transfer transaction.
Open Across the Pond and Beyond
In the U.K., open banking has created a path for faster payments. It became standard there in 2018 with an initiative that enabled U.K. banks to make bank transfers almost instantly, versus the typical three days for interbank transfer clearing. For example, HM Revenue and Customs (HMRC), the U.K.’s tax and customs authority, has pioneered the use of the Faster Payments service to collect and refund tax payments over the last few years, replacing card payments and slow interbank transfers.
The result has been a win-win. Many taxpayers have received their refunds in record time and HMRC has reduced its costs, streamlining its payment process for collection. PISPs can use the faster payments scheme to provide payment services for retail customers. Third-party providers are now seeing benefits when they offer open banking as a faster payment option for goods and services.
South Korea also launched an open banking service in 2019, which, according to The South Korean Herald, allowed customers to use any mobile banking application to access their accounts. Over 166.8 million accounts have been launched in South Korea so far. Other countries, like New Zealand, Australia, Singapore, Japan and Hong Kong, are also engaging in open banking and seeing positive results.
Open banking continues to grow, creating strong competition for card networks while creating a solid solution for consumers who don’t have credit card access. Last July, President Joe Biden signed an executive order encouraging the Consumer Financial Protection Bureau to issue regulations that make it easier for U.S. consumers to access their bank data and transfer it to other banks and outside apps like Venmo or Robinhood. As of this writing, there is currently no regulatory or legislative framework mandating open banking in the U.S., but it is likely on the horizon.
Cathy Beardsley is president and CEO of Segpay, a merchant services provider offering a wide range of custom financial solutions including payment facilitator, direct merchant accounts and secure gateway services. Under her direction, Segpay has become one of four companies approved by Visa to operate as a high-risk internet payment services provider. Segpay offers secure turnkey solutions to accept online payments, with a guarantee that funds are kept safe and protected with its proprietary Fraud Mitigation System and customer service and support. For any questions or help, contact sales@segpay.com or compliance@ segpay.com.
