Mastercard and Worldpay are embarking on a strong push to promote Mastercard's Pay by Bank system, which will likely face a deluge of competition under the updated Payment Services Directive (PSD2), which took effect this year.
Mastercard acquired Pay by Bank as part of its 2016 purchase of Vocalink, the U.K. bank- owned payments network operator. The system, which allows consumers to access their bank's app from a merchant's checkout page, could be easily duplicated under Europe's PSD2, which allows third parties to tap into bank data for their own services.
Worldpay will offer Pay by Bank, which was launched by Vocalink in 2015, to its U.K. merchants early next year. It will join two other acquirers that have already integrated with Pay by Bank: Barclays Corporate, which provides banking and payment services to businesses, and Wirecard. Barclaycard, Barclays’ main acquiring and issuing business, plans to integrate with Pay by Bank in 2019.
“Our Worldpay and Barclaycard deals are important, as anyone in the U.K. payments industry who needs scale with retailers must sign up Worldpay and Barclaycard,” said Jon Wood, senior vice president of consumer applications at Mastercard U.K. “We will be launching Pay by Bank with Wirecard’s U.K. merchants in the next few weeks. Pay by Bank is already the funding mechanism for Wirecard’s Boon virtual prepaid Mastercard account.”
The U.K. has seen significant growth in mobile banking in recent years, which may help Pay by Bank gain adoption. According to “The Way We Bank Now,” a report by EY and UK Finance, the country’s banking and payments industry association, U.K. customers logged into mobile banking apps 5.5 billion times in 2017, a 13 percent increase from 2016. This represented an estimated annual average of 275 logins per customer in 2017, UK Finance said.
Mastercard and Worldpay will also promote the Mastercard Digital Enablement Service and EMVCo's Secure Remote Commerce framework globally.
Pay by Bank uses the U.K.’s Faster Payments real-time network, which was developed by Vocalink. It involves “push” payments from a consumer’s bank account, instead of direct debits or “pull” payments where a merchant initiates a transaction. Vocalink is developing Faster Payments networks for the Clearing House’s RTP system in the U.S., as well as in Singapore and Thailand.
“Buying Vocalink meant that Mastercard was able to complement the Mastercard global cards rails capability with bank rails capabilities,” Wood said. “The acquisition was a recognition that the future of payments will be more than cards, although cards will be part of our lives for many years. As consumers, with the move to digital payments, we appreciate Faster Payments systems that move money in real time from our bank account to another account.”
A Pay by Bank transaction, selected as a payment option on the merchant's checkout page, is tokenized into a request to pay which is sent to the customer’s mobile banking app. From the bank's app, the customer can review the details and available funds before approving the purchase. The payment is sent in real time to the merchant, and the customer’s bank account is updated immediately.
Currently, Pay by Bank is a mobile and e-commerce solution. “Our plan is to extend Pay by Bank so that it can eventually be used in shops at the point of sale,” Wood said.
Mastercard wants to add a bill payment capability to Pay by Bank, including the ability to set up recurring payments to utilities or to subscription services such as Netflix.
“A utility bill would arrive as a request to pay in my mobile banking app, and I would press the Pay by Bank button to authorize payment,” Wood said. “We want to address the pain points with direct debits. Although many people in the U.K. pay utility bills via direct debit from their bank accounts, there can be problems with direct debit, such as billers taking the money at the wrong time.”
The plan for Pay by Bank
Mastercard has been conducting an 18-month Pay by Bank pilot with Barclays, one of the U.K.’s largest banks. The trial involves over 300,000 users of Pingit, Barclays’ mobile payments and P2P transfer app, along with 12 merchants.
“HSBC will be launching Pay by Bank with 3 million U.K. customers this year, and its subsidiary First Direct will be launching early next year with nearly 1 million users,” Wood said. “This will take us to around 10 million users next year.”
While Pay by Bank isn’t being promoted as a replacement for debit cards, it offers similar chargeback and consumer protections.
“As it involves bank-to-bank transfers, Pay by Bank is a natural evolution of debit cards into the digital world,” Wood said. “Some consumers will continue to use their debit cards for purchases, but others will be willing to use their mobile banking app. I don’t think many people will transition from using their credit cards to Pay by Bank, if they use credit cards to collect reward points and airline miles, to benefit from purchase insurance on credit cards or to revolve their balance.”
From a consumer perspective, the benefit of using Pay by Bank instead of a debit card is that the customer never gives any banking details to a merchant.
The merchant also sees a significant reduction in fraud, Wood said. “Tokenizing the consumer’s request to pay within their mobile banking app prevents fraud, which results in lower costs for merchants,” he said. “In terms of merchant fees, Pay by Bank will have similar charges to accepting debit cards. Another benefit for merchants is that the user experience is simple, which means less cart abandonment, leading to higher sales.”
The PSD2 threat
According to Wood, the greatest competitor to Pay by Bank is the advent of open banking in the U.K., following the introduction of PSD2 in January 2018.
“So far, Pay by Bank has seen limited traction in the market since it was first announced,” said Zil Bareisis, senior analyst at Celent. “It seems the announcement of the Mastercard-Worldpay partnership is an indication that Mastercard is keen to make Pay by Bank a success in the U.K. PSD2 enables account-to-account payments, where the merchant — or its service provider — can initiate a payment direct from the customer’s bank account, with their permission. Pay by Bank is a similar proposition (although the consumer initiates the payment) with the added benefit of a recognized brand.”
However, it is early days and still unknown how Pay by Bank will play out in the U.K.’s card-centric market.
“I think that Pay by Bank has great potential to become a success, if positioned rightly with consumers and merchants,” said Ron van Wezel, a senior analyst with Aite Group. “Think of the huge success of MobilePay and similar apps in the Nordic markets, and iDeal in the Netherlands. But, first of all, ubiquity has to be reached at the consumer side of the equation. That means an easy registration process, or, better still, no registration at all; finding key merchants to offer the payment method; and proper scheme management and governance to manage issues during the startup phase.”
Mastercard is looking to introduce Pay by Bank in other countries following its rollout in the U.K.
“The prerequisite is that there needs to be a real-time payment rail in any country where Pay by Bank is offered, plus adoption of mobile banking apps,” said Wood. “In countries such as the U.S. which are in the process of introducing real-time payments, we would wait until consumers and businesses get used to real-time payments before launching Pay by Bank.”
As part of the global agreement between the two companies, Worldpay will also support Mastercard MoneySend for debit push payments, enabling merchants to receive settlement payments to Mastercard debit cards within minutes.
Worldpay plans to leverage the Mastercard Digital Enablement Service technology for tokenization, and will support EMVCo's Secure Remote Commerce (SRC) initiative, which is working develop a single button for online checkout. Mastercard is also involved in the development efforts for SRC.
Vantiv’s $11.6 billion deal to buy Worldpay — extending the combined companies’ reach to 146 countries — closed early this year. Afterward, Vantiv — which was called Fifth Third Processing Solutions until just before its 2012 spinoff from Fifth Third Bancorp — changed its name to Worldpay.