The U.K. got an earlier start on open banking implementations, prompting European merchants and fintechs to turn to payments-as-a-service providers for rapid deployment.
The EU’s PSD2 open banking regulations enable authorized payments initiation service providers to initiate payments into and out of users’ bank accounts via APIs as an alternative to cards. In countries with real-time payment schemes, these transactions are settled immediately, unlike cards. Merchants may also pay lower fees for open banking payments.
Open banking-based payment-as-a-service providers such as Modulr, Tink, Token and TrueLayer have developed platforms that connect to banks’ PSD2-compliant APIs. Investors have been funding payment-as-a-service companies’ expansion plans. TrueLayer raised $25 million in September 2020, PayPal Ventures put £9 million into Modulr in November 2020, Tink raised €85 million in December 2020, and Token raised $15 million in January 2021.
Currently, the most prevalent open payments application is topping up
Open payments are authenticated with biometric IDs via banking apps as required by the EU’s Strong Customer Authentication (SCA) regulations, and customers’ financial information isn’t shared with merchants. However, open payments don’t provide the e-commerce chargeback guarantees offered by card schemes, so refunds are at merchants’ discretion.
In June 2019, Mastercard announced its
There has been strong growth in the enrollment of Mastercard Open Banking Connect, according to Jim Wadsworth, Mastercard’s senior vice president of open banking.
“We’ve also seen growth in the range of use cases implemented by our clients and the actual service usage by their customers,” he said. “Payment types experiencing strong demand include credit card repayments, for example for Lloyds Bank and Tesco Bank’s U.K. cardholders, e-wallet loads, and merchant payments.”
According to Mastercard data, it’s early days for adoption of open banking-based payments initiation services in Europe, and transaction volumes are far lower than for open banking-based account information aggregation services.
The U.K. is ahead of the EU, as it implemented open banking earlier. Also, Britain’s Faster Payments scheme has universal adoption among U.K. banks, while not all European banks support the EU’s SEPA Instant Credit Transfer system.
“Payments initiation adoption is growing rapidly in the U.K., and we’re seeing a growing number of providers offering payments initiation services there and in Europe,” said Celent senior analyst Kieran Hines.
In countries such as Germany, Italy, the Netherlands and Poland, consumers unwilling to use cards for online shopping already make significant usage of online banking e-payments (OBeP) schemes that predate PSD2 and use proprietary APIs or screen-scraping. Dutch OBeP scheme iDeal accounted for 68% of domestic e-commerce payments in the first quarter of 2020.
Thus, iDeal's customer base and other OBeP users may be predisposed to use open banking payments, said Aite Group senior analyst Ron van Wezel.
Open banking-based payments-as-a-service providers have identified an opportunity to provide businesses with a range of other facilities besides payments.
“Areas where third-party providers add value include providing invoice and billing processes for SMEs, payment acceptance for small businesses unwilling to accept cards, and request-to-pay bill payment services replacing card-based bill payments,” said Hines. “We’re seeing quite a lot of third-party providers enabling API-initiated payments as the only payments method small businesses will accept. Also, providers such as Modulr and TrueLayer are strongly focused on enabling digital banks and fintechs to build new services, for example supplying companies such as Revolut with payments infrastructure.”
In January 2021, TrueLayer launched its PayDirect payments-as-a-service platform, acting as processor/acquirer for payments initiated via its API.
“We’ve seen merchants and fintechs starting to promote payments initiation over cards acceptance at checkout,” said Francesco Simoneschi, TrueLayer’s CEO. “During 2020, our payments initiation API saw triple-digit month-on-month growth in transactions in the U.K. and Europe. So we decided to provide an entire open banking-powered platform that offers value-added services addressing shortcomings which payments initiation by itself doesn’t solve.”
TrueLayer’s clients include investing platforms such as U.K.-based Trading 212 and Freetrade, which use its data API to check that customer funds originate from a legitimate bank account whose owner's name matches the registered customer’s name, and its payments initiation API to fund customers’ accounts. It also provides payments initiation services for B2B payments platform Payoneer in the U.K. and EU.
Todd Clyde, Token’s CEO, said the U.K.-based firm’s Token Pay platform processes transactions through PSD2-based APIs from over 600 banks in 14 European countries, with volumes growing 1,000-fold during the pandemic.
“Banks and payment service providers can use Token to offer open payments through their existing platforms, and merchants can integrate directly with Token or through PSPs to accept bank account payments from their customers,” he said.
Open banking payments-as-a-service providers can enable their corporate clients to automate and control their receivables, payables, payroll, and disbursements.
“By using payments-as-a-service providers, executives can outsource the plumbing and focus on the most important matters for their business such as the customer experience and managing risk,” said Rafa Plantier, Sweden-based Tink’s U.K. and Ireland country manager.
As they have E-Money Institution licenses, Modulr and TrueLayer can hold funds in settlement accounts with IBANs (international bank account numbers) for clients, from which clients can make disbursements or refunds and reconcile incoming payments.
“We provide a one-stop-shop alternative for corporate clients who traditionally would use their bank in combination with a vendor such as Bottomline Technologies for transactional banking,” said Myles Stephenson, U.K.-based Modulr’s CEO. “We give companies access to an automated payments and account infrastructure via APIs that is embedded within their own software and services.”
Stephenson said Modulr is seeing a growing number of software vendors wanting to become payments businesses, so that they can offer integrated payments capabilities to their clients.
“We enable software platforms such as accounting or payroll software vendors or property rental platforms to embed payments,” he said. “This means their clients can accept payments from their customers within the platform without being redirected to external payments providers.”
The payments industry is moving towards platform-based value propositions offering SMEs a one-stop-shop to fully manage their businesses, according to Francesco Burelli, a consulting partner at advisory firm Arkwright.
“Platform concentration is bad news for traditional banks, as they risk being displaced in the relationship with their SME customers,” he said.
Modulr is one of several U.K. fintechs with a settlement account at the Bank of England, enabling it to be directly connected to the Faster Payments scheme. “This puts us on a level playing field with the likes of Barclays and HSBC,” said Stephenson. “We can provide the payments plumbing behind a new fintech’s service. For example, we use our API to provide accounts with U.K. sort codes and bank account numbers for Revolut’s U.K. customers, and handle all the payment flows to these accounts.”
Tink initiates one million payments per month in the U.K. and Europe, which is growing by double-digits month-on-month, Plantier said.
“Tink is bullish on the future of payments initiation, which is why we’re investing heavily to broaden our European coverage,” he said. “Our payments initiation service is available in five markets, and we want to expand this to 10 in 2021.”
