U.K.’s TrueLayer brings banks into e-commerce with open banking API

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TrueLayer has launched one of Europe’s first open banking-based payments APIs.

Under the European Union’s PSD2 and the U.K.’s Open Banking regulations, licensed third-party payments providers like TrueLayer can provide payments initiation services, enabling e-banking users to send payments from their accounts to merchants’ accounts. Funds are received in minutes, and customers are required to authenticate themselves with their bank to reduce fraud risk.

From September 2019, under PSD2, the EU will require two-factor authentication for online payments from cards or bank accounts. European payments service providers will need to offer authentication methods involving at least two factors from three different categories: “knowledge” (password or PIN); “possession” (smartphone or card); and “inherence” (e.g. biometrics).

TrueLayer, which is based in London, says its API is a cheaper, faster and more secure way to make online payments than using credit cards or manually entered bank transfers. TrueLayer is licensed by the U.K.’s Financial Conduct Authority as an authorized payment institution for account information services through its open banking data API and payment initiation services through its payments API.

When merchants integrate with TrueLayer’s payments API, TrueLayer provides a payments initiation URI (Uniform Resource Identifier) so the merchant’s customers can connect to their bank. After a customer has authenticated a payment, TrueLayer executes the transfer and redirects the customer back to the merchant’s site. Unlike traditional bank-to-bank transfers, customers don’t need to manually enter a merchant’s bank account details, nor do they have to enter their card number.

“Our payments API is an open banking interface enabling consumers to pay merchants directly from their bank accounts,” said Francesco Simoneschi, TrueLayer’s CEO. “It works with the nine largest U.K. banks, known as the CMA9, which were required by the U.K.’s Competition and Markets Authority to implement the U.K. Open Banking standards.”

Simoneschi said the API has been tested by a dozen startups including digital wealth manager Moneyfarm and financial API provider WealthKernel, and is now in public beta with 20 companies.

TrueLayer will launch an updated payments API later in 2019 adding future-dated payments, standing orders and batch payments. It is also looking to expand into Australia and South East Asia, as open banking is expanding rapidly in those regions, said Simoneschi.

“Initially, the verticals most likely to adopt our API are fintechs, investment firms and cryptocurrency exchanges,” said Simoneschi. “Historically, these firms have experienced challenges with setting up customers’ fund transfers. Later, our payments API will get adopted for online shopping, as it offers instant settlement via the U.K.’s Faster Payments and cheaper transactions than credit cards. There will be no chargebacks, as payments are irrevocable.”

Simoneschi said that open banking-based payments will challenge the dominance of the card networks, because of the better user experience compared to using cards and the lower cost and security benefits to merchants.

“Approving online payments on smartphones will be seamless, if you’re just logging into your mobile banking app with Face ID or Touch ID,” Simoneschi said. “But initially merchants may need to incentivize customers to use open banking-based payments instead of their cards. They could offer loyalty points, bonus rewards or discounts.”

Banks, faced with potential loss of revenues from card transactions, could develop premium transaction services for open banking-based payments.

“For example, banks could leverage our API to support variable, recurring payments like subscriptions or card-on-file-type services that have been the domain of credit cards,” Simoneschi said. “They could charge merchants a premium for these new services to recoup revenues lost from card transactions migrating to open banking-based payments.”

Another opportunity would involve card acquirers becoming payments initiation service providers.

“This is a major shift in the industry, which will take time,” Simoneschi said. “But I can see acquiring banks mixing credit card payments with payments initiation services.”

While the majority of banks are engaged in developing open banking-based account data value propositions, new payment initiation services are being developed mainly by fintech new entrants, said independent payments industry expert Francesco Burelli.

“There will be many new entrants in this market offering lower-cost, pay-per-click alternatives to card payments to merchants and businesses," he said. “Cards have been an attractive target for bank account-based payment interfaces looking to displace them with account transfer-based solutions.”

The benefit to merchants of accepting account-based payments instead of cards is greater in the B2B space, as commercial cards interchange hasn’t been lowered in Europe, Burelli said.

“However, the EU regulators capped interchange for consumer credit cards two years ago, which may lead to a diminished cost attractiveness for alternative payment solutions from a merchant perspective,” Burelli said.

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