The Open Banking market is booming and the global value of Open Banking payments is expected to exceed $116 billion by 2026 — up from $4 billion in 2021.
Open Banking is driving innovation in the financial services sector and its adoption is on the cusp of major growth. However, convincing large merchants to adopt Open Banking payments remains a challenge for the industry.
In this article, I’ll delve into the challenges faced by Open Banking today and what we can learn from the adoption of Chip and PIN card payments in the late 1990s/early 2000s.
Chip and PIN rollout in Europe
Over 20 years ago, I was charged with the roll-out of Chip and PIN in Europe for Visa. This marked a major turning point in the payments industry and I was proud to be at the forefront of such an important transition.
After developing the technology and proving its worth, we had the challenge of convincing merchants to accept and support the new payment infrastructure.
Let’s dive into the four key things that Visa and Mastercard did to encourage merchants to adopt Chip and PIN payments.
What were the 4 pillars of Chip and PIN card adoption?
1. Set strict standards
Visa and Mastercard introduced a clear set of standards to ensure that there was interoperability, ease of use and security between bank cards and the merchant infrastructure that they used to process payments. This is the backbone of the card schemes.
2. Regulate participants
The card scheme membership is highly regulated. Authorised card issuers and card acquirers have to go through an extremely rigorous process before they can use the card rails and systems.
Having such a strict process in place to regulate key players, along with the technology used, ensures that the system works continuously and encounters minimal technical issues.
3. Test the technology
Chip and PIN payments were tested against the EMV (Europay, Mastercard, and Visa) standard to ensure that the technology was secure and reliable.
Regular independent testing ensured global interoperability by checking that all parts of the technology worked effectively against the standards that were set. This established a high level of security and trust among consumers and merchants.
4. Protect the adoption: the liability shift
Rules were introduced to protect the adoption of Chip and PIN payments. In the case of card schemes, this was in the form of a liability shift for Chip and PIN payments.
If a customer used Chip and PIN to make a payment, the Issuing Banks would know that the card was present at the Point of Sale (using cryptography) and that the cardholder entered their confidential PIN. At the time when Chip and PIN was introduced, this was equivalent to the Strong Customer Authentication (SCA) requirements.
As a result, this would provide a guarantee to merchants that they would be paid and would not be open to disputes around the cardholder not being the one who purchased the goods.
By introducing a liability shift for Chip and PIN payments, card schemes aimed to incentivise the adoption of the payment technology and protect both consumers and merchants from financial losses.
This approach has proven to be effective in promoting the widespread global adoption of Chip and PIN payments, which are now the standard payment method in the majority of the world.
So what was the outcome?
My team spent three to four years from 1996 focusing on the first 3 pillars and we believed the rollout was a success. However, we quickly noticed that large merchants like supermarkets were still hesitant to adopt Chip and PIN technology.
We discovered that the main reason behind this was around the guarantee of payment and concerns about potential payment disputes. If Tesco, for example, were going to invest a significant amount in the technology, they wanted to be protected — and quite rightly so.
Another two years were spent trying to encourage widespread adoption and we realised that we needed to introduce the liability shift. Large merchants had to be confident that they would get paid and be protected before they would adopt the new payment method.
Why is this important and what can we learn from this?
I see several similarities between Chip and PIN payments and Open Banking which I will outline below:
- Defined standards: Open Banking has defined standards and specifications that enable interoperability across banks and 3rd party providers (TPP/Fintechs). It also includes customer experience guidelines that aim to ensure a consistent and user-friendly experience for customers when they use Open Banking services.
- Highly regulated: Open Banking requires participation in a Trusted Ecosystem (Open Banking Implementation Entity – OBIE) that is underpinned by regulations and standards set by the Financial Conduct Authority (FCA).
- Proven technology: Payment initiation has been built and refined over many years. Today, this technology offers a secure and reliable way to pay between the sender and receiver of a payment across bank-to-bank transfers.
Open Banking is designed to promote competition, innovation, and customer choice in the financial services industry.
So why aren’t large merchants like transit companies and supermarkets jumping on board, especially when we know that Online Banking payments can (and should) be cheaper to process than UK Debit Cards?
The bottom line is that merchants are always hesitant to invest in new payment technology. They need to be confident that they will get paid for the goods and services they give to customers.
While it’s true that merchants don’t get paid immediately when processing card payments, they know that they will because of the rules governing payments. Open Banking is missing the strict rules of engagement that have been so successful in encouraging the adoption of Chip and PIN payments.
Open Banking vs Chip and PIN payments
- Step 1: The customer presents their payment card to the merchant and the merchant requests authorisation from the card issuer which is usually a bank.
- Step 2: To prevent fraud, the customer is required to authenticate the transaction, typically by entering a PIN code (or biometric for online payments).
- Step 3: The bank is notified that the card (and cardholder) are present, so they approve the transaction.
- Step 4: The transaction is then settled between the merchant’s acquiring bank and the card issuer via Visa/Mastercard. The bank essentially tells the merchant they will get paid later, making it a reliable and protected form of payment.
Open Banking payments:
- Step 1: A merchant instructs the customer to pay for a product or service. As part of the Open Banking flow the customer logs into their bank’s online banking App/portal to authorise the payment.
- Step 2: The customer’s bank checks that the customer is happy for them to send the money to the merchant. They also ask the customer to confirm their identity via a form of secure authentication such as biometric authentication.
- Step 3: The bank tells the merchant that the payment instruction has been received and then processes the payment.
- Step 4: The funds are then transferred from the customer’s account to the merchant’s account through the appropriate payment system (Faster Payments System in the UK).
Why aren’t Open Banking payments considered a guarantee of payment?
The same process happens in card payments and it’s accepted, but it is not considered a guarantee of payment in Open Banking.
While Open Banking does provide certainty of payment it is not necessarily trusted at this time by many high-volume merchants.
To overcome this challenge, Open Banking needs to introduce strict rules of engagement so that merchants are confident that the merchant will get payment. In my opinion, setting out clear rules is the key to convincing large merchants to adopt Open Banking payments.
Overall, the adoption of Chip and PIN cards provides a roadmap for the successful adoption of new payment technologies. The lessons learned from that experience can be applied to the development and adoption of Open Banking payments.
The liability shift was a crucial element behind the widespread adoption of Chip and PIN payments in the late 1990s/early 2000s. Open Banking should follow suit if they want to ignite innovation and encourage large merchants to embrace the technology.