Open Banking — the Next Big Payments Innovation?

The New-Old Payment Rails

In the European context, account-to-account (A2A) payments enabled by the continuous adoption of the open banking standard (UK) and PSD-2 (EU) are the talk of the town currently.

Really, there is nothing fundamentally new in the underlying payment rails (in the European context) which rely on the same old SEPA. However, there is massive potential in reinventing and embellishing various payments use-cases and bringing them closer to the customer. Payment initiation, account top-up, recurrent billing and embedding payments into user journeys all get a bit of a different flavour with open banking (at least in theory).

Then there is the cost. A2A are virtually costless for the participating parties when compared to the card payment rails. Or, at least 10x cheaper — this seems to be the prevailing messaging of the open banking startups marketing departments when it comes to communicating their proposition pricing.

Also, consider here the ultimate goal of instant SEPA payments across the Eurozone. According to the ECB:

The ultimate goal is to provide certainty to European citizens and businesses that they can instantly transfer funds in euro, both in physical shops and online, throughout the EU. They can be certain that the funds will reach their counterparty and confident that their instant payments will be settled, regardless of the numerous actors that may be involved in the process.

Furthermore, pan-European reachability across the payment processing chain is necessary to foster innovation in the area of safe and convenient front-end solutions which will benefit both businesses and consumers.

A (big) grain of salt needs to be applied here to expectations on when this is going to happen — especially when one considers the speed at which the PSD-2 is being rolled out and enforced across Europe.

Nevertheless, imagine if the convergence of embedded A2A payments and instantaneous SEPA transfers actually plays out (and achieves significant adoption). This would mean effectively real-time and 10x cheaper payments across the board in Europe — a big push in payments innovation for businesses and consumers alike.

The Big Question

The looming question is whether adoption of this new payment rail by merchants and ensuing; by consumers can get to critical point to actually challenge to dominance of the card networks.

And if so; who will emerge as the new Visas and Mastercards in this space?

Slicing The Approaches

It would be a mistake to underestimate how much activity happening in the space; particularly in the UK where the open banking standard is ahead by roughly 24 months in comparison to continental Europe by my rough estimate.

What are the vectors of attack for A2A payments? In the broadest sense, they copy traditional payment rails; but there are several key areas and use-cases that the A2A startups focus on:

  • Solving for Ecommerce Payments — solving for the ecommerce checkout and auxiliary use-cases such as refunds; embedding payments in the online spaces (marketplaces, consumer apps) in general sense.
  • Solving for B2B Payments — Invoice payments & b2b supply chain payments in the broadest sense.
  • Solving for Physical Retail — Physical POS payments between consumers and merchants.

There are many startups attacking the open banking payments space from different angles. My mental model revolves around 3 approaches (these are not entirely MECE but I hope all the McKinsey consultants will forgive me)

1 All-encompassing

Startups that position themselves as a one stop shops & platforms open banking payments. Vyne Payments (https://www.payvyne.com) and Volt (www.volt.io) are good example here. They are well funded as one of the first movers in the space in the UK and are putting the money to use.

Vyne; for example; is aiming to build “full-stack account-to-account payment solution for merchants”. They deploy A2A payments for merchants in the broadest sense, communicating solutions in.

Volt, besides a checkout solution; is differentiating on their global approach to open banking payments. Their product, Switch, claims to “bring together banks and networks across geographies and maps functionalities across our market-leading open payments grid.

Banked (https://banked.com), another contender from the UK takes even more broad approach, claiming to be a platform for “real-time payments for consumers, businesses and banks, improving customer experience, payment security, business efficiency and cost effectiveness.”

Their product portfolio spans payout solutions, checkout solutions, payment links, solutions for charities/donations and more.

2 API-as-an-endpoint

One of my favourite takes on open banking payments are the pure “infrastructure enablement” plays, delivering the open banking payments capability via APIs anywhere there is utility.

A simple example here is the b2b payments space — for example, creating A2A payments-enabled invoices directly in your company’s accounting platform of choice.

This takes the challengers to a face to face competitors with established players like Truelayer and others, but I expect multiple startups attempting to crack the space with this particular “no front-end” approach.

For example, Crezco (https://www.crezco.com) is an early entrant to the space taking this particular approach and focusing purely on the API as an endpoint in their product value chain.

3 Heavy use-case/segment focus

Then there are startups who are positioning themselves as solving A2A payments for a particular use-case or segment.

Hailing from Estonia, Montonio (https://montonio.com) is using open banking payments as a key part of their proposition. However, this is not about the payments itself but rather a part of a heavily merchant-focused value prop which spans from financing to payments to checkout funnel insights.

Trilo (https://www.trilo.io) is similar but different. They tackle merchant payments as well but from a very different angle by focusing heavily on the end customer. For example, the Trilo payment app thus encourages usage on the retail side by rewarding customers every time they pay by

Yet another group of early stage startups focuses on the small entrepreneurs and small businesses — Osu Pay (https://www.payosu.com) and Coupay (https://coupay.co.uk) are both good examples of companies bundling value-added services like easy invoicing with underlying A2A payments infrastructure.

Thin-margin Game

There is one underlying question which remains to be answered — how will these companies monetize their services? The core service — open banking payments provisioning is a margin-thin business when compared to traditional card payments.

There are several avenues here — competing on the infrastructure side with thin margins, pivoting into a more traditional b2b business models with white labelling fees (for those focusing on larger enterprises) or tiered subscription fees (smaller merchants).

More innovative approaches will see A2A players using the A2A payments as an essentially free-of-charge baseline and provide new monetizable value to the customers.

The opportunities on these fronts are limitless; depending on the segment and positioning. For merchants small merchants, embedding auxiliary financial services (i.e. factoring, revenue-based credit) to data analytics or optimization of payment/checkout funnels all seem like plausible plays.

All things considered — keep an eye on this rapidly evolving space!

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