Could FIS use open banking to pry merchants away from card networks?
Merchants finally have a range of alternatives to accepting payment cards in Europe, thanks to open banking initiatives. But switching to instant payments is no easy decision, even if it's cheaper on paper.
Interchange rates — at least in Europe — have steadily declined in recent years under regulatory and legal pressure, so the cost of accepting cards is lower than it was years ago when merchants began their fight for alternatives. Card networks have also stepped up their technology game.
Merchants considering switching to the cheaper, account-to-account payments must weigh the benefits against the costs of upgrading existing technology and changing internal processes to support an open banking-driven payment method.
Getting paid instantly from a buyer's bank accounts means retailers can use data to customize offers, but it introduces new responsibilities for managing irrevocable payments directly with customers, including handling refunds.
Among providers looking to bring instant payments to merchants, FIS says it’s hit on a solution bridging these dilemmas by combining its legacy bank services with the retail-centric perspective gained in its $35 billion merger last year with Worldpay.
Still moving rather cautiously in its relatively new role as a global fintech, FIS last month rolled out Worldpay Open Banking Hub, enabling consumers to make purchases directly from their bank accounts for participating merchants in the U.K.
So far the service is available only for online merchants. The sole client that’s collaborated is the U.K. government, which has approved FIS' hub as an option for different government agencies to accept payments such as taxes, fees and fines.
But FIS expects that by moving deliberately, it can steadily build trust on the merchant and consumer sides for real-time payments, and expand the hub’s geographic reach later this year, according to Charles Damen, FIS’ London-based senior vice president for product strategy.
“We’re offering the hub first for online merchants, but any kind of merchant can use it,” Damen said, adding that France, Germany and Italy are next on the FIS road map for instant merchant payments.
Food-delivery providers and gaming services are likely to be in the first wave of private merchants using FIS’ hub, followed by purveyors of digital services and utilities and eventually brick-and-mortar stores, according to Damen.
“Merchants adopting instant payments no longer have to wait to get paid, plus they cut payment processing costs, eliminating card interchange, chargebacks and other network fees,” Damen said.
FIS isn’t alone on the merchant instant-payments frontier. Mastercard’s U.K. Pay by Bank instant-payment service, launched in 2016, had a slow start. A few weeks ago NatWest launched Payit in the U.K., and others are expected to roll out services in the next year.
Ovum, a market research and advisory firm, predicted a few years ago that open instant payments could overtake card payments online by 2024, but there are many hurdles to clear before merchants develop such momentum.
The biggest challenge is overcoming the inertia of deeply ingrained processes. Merchants typically are reluctant to make core changes, consumers are wary of new payment approaches and instant payments upend the buying power of credit.
FIS has worked to streamline the merchant onboarding through an API-based process and a single integration, and merchants adding its hub can still offer all other types of payments, Damen said.
“It’s just a matter of adding the hub to the 300 different payment options we already support, with everything from cards to PayPal, Alipay, WeChat, Klarna and others,” he said, noting that the online integration is the simplest.
FIS’ decision to roll out an instant-payments service during the pandemic could cut both ways. Consumers concerned about their finances may need extra reassurance that instant payments are safe. But those with shaky finances may welcome the greater transparency of instant payments and never being declined for a purchase, as long as their bank account has sufficient funds.
Transaction fraud through the FIS hub is nearly zero because of the security mobile banking apps provide, according to Damen.
“Someone would have to steal your mobile banking credentials, which would be a bigger problem,” he said.
When making a purchase through the hub, consumers are redirected to their bank’s mobile app where they’re authenticated via Face ID or a confirmation text, and they can view their bank balance in real time.
One big drawback is that consumers making instant-payment purchases must negotiate directly with the merchant in case of a dispute, because bank transfers are irrevocable under Europe’s open banking rules.
Damen points out that merchants could also strive to win consumers’ loyalty by making refunds occur instantly.
“Merchants that don’t refund consumers’ money immediately will risk their reputations with social media, but what’s more likely is that merchants will be speedy about refunds because they will want to make another sale to that person,” he said.
Merchants also have the option to develop their own rewards and incentives with instant payments and use data to customize offers, Damen pointed out.
Given consumers’ expectation of streamlined and contactless checkouts in a growing number of venues, the customer experience with FIS’ hub will make or break its success, said Zilvinas Bareisis, a senior analyst with Celent.
“Refunds will be a key challenge for instant payments,” Bareisis said, noting that consumers have been conditioned to expect straightforward refunds.
Adoption of instant payments will likely be gradual, but FIS isn’t operating in a vacuum with instant payments. In the Netherlands, the account-to-account merchant payment system iDEAL has at least 60% market share, Sweden-based Trustly merged last year with Silicon Valley-based PayWithMyBank and other upstarts are gaining ground, Bareisis pointed out.
“Education and incentives will help, as well as clear branding of the solution, which would help build confidence among consumers over time,” Bareisis said.
FIS still has its work cut out in displacing cards.
“FIS are certainly well placed to drive adoption of instant payments, given their relationships with both merchants and financial institutions, but they’re not the first,” Bareisis said, noting that other instant-payment services open banking unleashed, such as Pay by Bank and Payit, haven't made much of a mark yet.