An open banking payment is when a consumer lets a 3rd party initiate a payment from their bank account.
For example, a business might let PaySauce to initiate payroll payments from their bank account.
That could be a one-off payment, or a recurring payment, or a variable recurring payment.
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Yes - open banking payments are conceptually similar to direct debits. But there are some important differences.
One of the crazy things about direct debits is that you can type in any old bank account number on the direct debit form… open banking payments enable you to verify the holder and account number before the payment is initiated.
Direct debits can cause the account holder to incur dishonour or overdraft fees if the account doesn’t have sufficient funds. With open banking payments, the available balance is checked before initiating a payment, so the consumer isn’t pushed into unexpected fees.
Open banking payments provide full control of the timing of the payment. And with bank account connectivity, you can offer round-up, sweeping, and other payment functionality that requires access to account data.
Importantly, for the consumer, there is simple visibility and control over the payment consent. A consumer can digitally revoke their consent at any time.
Let's start with pricing, because that’s normally the main driver.
We’ll use the example of My Food Bag (MFB), since they have some publicly available numbers (I’m adding some assumptions, so this is just illustrative).
MFB reported $52m of revenue for the last calendar quarter of 2021. Assuming card fees of 1.5%, that’s an estimated $780,000 of card fees they’re swallowing each quarter.
If all 71,085 active MFB customers were using open banking payments instead of cards, the cost would be around $35,000, meaning an extra $745,000 of quarterly profit. That would be a ~8.7% increase to annual EBITDA (based on pro forma F22 results). Imagine an option to "link your bank account" like the current option to link your card.
In addition to pricing, there are a number of attributes that make open banking payments attractive relative to cards:
Here are some scenarios where we’re seeing adoption already.
Open banking payments are a great fit if your product already has secure customer accounts. If that’s the case, you can offer customers the ability to link a bank account, just like linking a Mastercard or Visa card.
These verticals seem particularly well-suited to open banking payments:
Some countries like the US and the UK are much further ahead of NZ when it comes to open finance. So we can look at what’s happening there to inform potential pathways.
US
The US benefits from ubiquitous payment apps like Venmo and Cash App. Consumers have already connected their bank accounts to these apps, and use them frequently for peer-to-peer payments. These apps provide a foundation for merchant payment solutions like Cash App Pay, where a consumer can pay a merchant by opening their payment app and scanning a QR code when making an online or in-person purchase.
New Zealand doesn’t have a ubiquitous modern payment app yet. But BUCK, Dosh, and Dolla have already made product announcements, and I expect that there’ll be at least 1 popular new payment app within the next 2 years. Further down the track, I expect we’ll see open banking payments tied to NZBNs and einvoicing.
The US also shows how fintech apps can leverage bank account connectivity for payments. There’s a common onboarding pattern for US-based fintech apps like Robinhood and Coinbase: first you complete an AML/KYC process, then you connect your bank in order to fund your account, then you’re ready to start using the product immediately.
I expect that this pattern will be adopted by some of Sharesies, Hatch, Flint Wealth, Tiger Brokers, Easy Crypto, and other investment platforms and fund providers.
UK
Payments are the fastest growing use case for open banking in the UK. At the end of 2021, over 26.6m open banking payments had been made. But it’s the rate of adoption which is impressive - the volume of open banking payments increased by more than 500% in 2021.
I expect that NZ will follow a similar path, where there are a broad range of “read” and “write” use cases, but payments will represent the majority of open finance activity within the next few years.
Card companies
Visa and Mastercard recognise the threat and opportunity of open banking payments, and have started to make acquisitions and investment in this space. For example, Visa acquired Tink, and Mastercard acquired Finicity and Aiia. Competition regulators are paying attention to these transactions, and at least one acquisition has been blocked to prevent card companies from using their market power to lessen competition in retail payments.
Closer to home, Mastercard has become an “Accredited Data Recipient” in Australia, and has established an open banking consulting practice that is active in NZ.
Would you like to explore open banking payments in more detail? If so, let’s talk.
If you’re a developer and interested in accelerating the uptake of open finance, we’re always on the lookout for talented people.
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