Jan Van Vonno (pictured), head of industry strategy at Tink, tells Open Banking Expo about the main findings from its latest payments research and why widespread adoption of instant payment rails in Europe is so crucial.
1. Tell us about the latest Tink report ‘The future of payments is open’ and the key findings from that report.
The narrative in the market has largely been around all the opportunities to use data for the exchange of information and that’s also where we’ve seen some of the most prominent use cases. So, for account check, the personal finance management, income verification, risk insights, some of these use cases have been successfully deployed across Europe and with many large enterprises, and they’re seeing a lot of uptake and potential.
Yet, the conversation around payments hadn’t kicked off yet. Sure, it was becoming a much more prominent discussion within the UK market, but in other markets around Europe, which is 17 of the other countries where Tink is live, the discussion around payment initiation services (PIS) has been overshadowed by the opportunity of account information services (AIS).
So this report was an opportunity for us to start to broadcast to the market what the industry really thinks about payment initiation services, where those opportunities are, and what the key drivers and barriers to adoption would be. Our objective for every research report is to give an unbiased, objective view in terms of how the market is maturing, but also to raise awareness of some of the most critical issues that we need to solve as an industry.
2. What did your research find in terms of the challenges and the main issues that financial institutions currently face, and how PIS can resolve those?
Last year, we already concluded that financial executives are very bullish on the prospects of payment initiation. In fact, it was ranked as the number one use case that financial executives were exploring as part of their Open Banking strategy. We knew that financial executives were looking at this because it presents various benefits – so it could allow them to significantly lower the costs of accepting money, it could allow them to reach a much broader population of potential customers and payers, it could allow them to innovate around the existing invoices or batch payment solutions.
What we found, in particular, is that finance executives see benefits in terms of the real-time nature of payment initiation services – assuming of course, that payment initiation services would run over instant payment rails, which don’t exist across all markets and are not supported by all banks in Europe yet.
Then, of course, the technology itself is very secure. So there’s been little to no fraud reported over payment initiation services. That’s because not only does the receiving bank do customer due diligence over the merchant, or whoever is receiving payment, so is the PIS provider doing customer due diligence. The recipient of any payments is not screened once, but screened twice. So it’s an incredibly secure payment method in the markets – that’s one of the key benefits for financial institutions in particular.
For merchants, it goes a little bit further. Not only is the real-time payments aspect interesting, but in particular, bringing higher security into payments and lower costs are seen by merchants as two of the three most important benefits. To make a comparison to, for instance, traditional card payments. Typically, a percentage is charged over the transaction amount and that’s because the percentage would reflect the relative risk in association with that transaction amount.
With PIS technology, what is far more common is there to be a flat fee and far fewer stakeholders in the payments process. So that’s where you’re sort of moving to lower cost payments. Once you understand those benefits, you can also start to identify what use cases are going to be first-to-market for PIS.
3. In Tink’s research report, the main barrier to adoption identified by executives was limited adoption of instant payment rails. Why is it so important that we see this, and how quickly do you think we are getting to more widespread adoption across Europe of instant payment rails?
Right now, markets such as the UK benefit from the existence of the Faster Payments scheme, and that has allowed payment initiation services to leverage that technology, although it isn’t perfect yet. Faster Payments are fast payments, but they’re not instant, they’re not real time, because there’s still a window of 60 seconds for a bank to potentially reject a payment or to ask for additional information on a payment.
In Europe, there are ample payment technologies, which are all operating on what they call the SEPA [Single Euro Payments Area] payments instant credit transfer scheme, and this scheme would allow for immediate settlements. The moment the payment is executed, the payment is settled with the creditor. That means that using payment initiation technologies, especially in a commercial setup, would allow a merchant to immediately verify whether funds had been received and for the release of goods or services.
Considering that’s not the case today, a lot of the use cases fall outside of where the sweet spot is. Let’s say, in-store ecommerce payments would typically fall outside of that sweet spot, because the merchant cannot immediately, within seconds, verify whether the funds have been received and confirm to the payer or to the consumer, that the ordered goods will be sent to their address.
Instant payments are going to be so critical. Now, there are opportunities for PISPs to innovate around that. However, it goes a little bit against the whole idea of PIS, because payment initiation service providers, in virtue, do not hold customer funds. PIS providers instruct the bank, instruct the existing infrastructure for the movement of money without holding any of the funds of the customer or the merchant themselves. There are ways for how PSPs can innovate around instant payments, but it comes at a huge expense. It goes a little bit against the idea of driving PIS for more competition within the markets.
European Commissioner for Financial Stability, Financial Services and the Capital Markets Union Mairead McGuinness announced that by the second half of this year, the Commission will propose a regulation that will make instant payment rails mandatory for all banks operating within the EEA. We haven’t seen the proposal yet, but the expectation is that that would be the on the basis of non-discriminatory rules that a bank may not charge more for instant payments than they do for batch-based payments, and that they must be able to send and receive such payments.
4. Another interesting finding in the research is user awareness. How important is that for the adoption of PIS?
While we agree that awareness of a technology drives adoption, of course, we disagree that awareness should be in relation to the technology itself. So familiarity with pay by bank, for instance, is something that helps adoption because recognition of those terms, ultimately, builds trust and familiarity and then, at the end of the day, drives adoption.
We firmly believe that awareness does not have to be at a technology level. Users do not need to be aware of the technology that they are using, whether it’s Open Banking or payment initiation. What they need to be familiar with is the payment solution or the brand that they’re paying with.
5. What else can readers of the report expect?
I would recommend taking a look at the interviews that we have in the report and, in particular, the Stripe interview. In the interview, it is emphasised that European markets are seeing a massive drive towards account-to-account payments, and payment initiation services is what will enable these types of payments across Europe. I think it’s important to recognise there are so many macro factors that are pushing the market in this direction.
Read what Tink’s VP payments and platforms Tom Pope had to say about the ‘spectrum’ of use cases Open Banking-enabled payments can solve in this Q&A.
