New entrants taking advantage of PSD2 regulations to offer open payments-initiation services in Europe are faced with incumbent online banking e-payments providers with established customer, merchant and bank relationships. In order to compete, open payments providers need to match the value-added merchant services and user experience offered by online banking e-payment (OBeP) schemes. Robin Arnfield reports
OBeP services were launched in Germany, the Netherlands, Austria, Sweden and Italy during the 2010s, and have received significant adoption from consumers who are creditaverse or reluctant to use cards online.
A key factor for merchant adoption of OBeP services is lower payment-acceptance costs compared to cards.
OBeP plays a major role in European e-commerce, enabling consumers to transfer funds from their bank accounts to merchants for purchases. In 2019, online bankingbased e-payments to merchants accounted for 16.3% of Europe, Middle East and African e-commerce payments, according to WorldPay’s Global Payments Report.
According to Oscar Berglund, CEO of Sweden-based OBeP service Trustly, there is continuous growth in OBeP payments in Europe. “A few years ago, when you made an OBeP payment, you had to enter a long password or you needed a piece of hardware to calculate a one-time code,” he says. “Now you can use your mobile banking app with a fingerprint reader or FaceID. This makes it much easier to pay for purchases from your bank account. So, easier authentication is a key driver for the increased consumer adoption in OBeP.”
The leading OBeP schemes are Netherlands-based iDEAL; MyBank, which is used in Italy, France, Greece and Luxembourg; Finland’s Verkkopankki; Germany’s Giropay; Poland’s pay by link; and Austria’s eps. iDEAL accounted for 68% of Dutch e-commerce payments in the first quarter of 2020, according to iDEAL spokesperson Berend Jan Beugel.
Incumbent OBeP schemes initially used proprietary protocols to redirect consumers from the merchant’s checkout page to their bank’s e-banking website or mobile app to authorise payments. While OBeP services such as MyBank still use proprietary technology to integrate with banks, others such as Trustly, Germany’s Klarna Sofort – also known as Pay Now by Klarna – and Paysafe Rapid Transfer now use PSD2compliant open payments APIs in Europe.
Since 2019, Europeans have been able to use PSD2-compliant open payments-initiation services provided by third parties as an alternative to OBeP schemes for e-commerce purchases.
PSD2-compliant payment initiation service providers (PISPs) use open banking APIs to enable customers to authorise payments from their bank account when redirected to their bank’s e-banking website or mobile app. PISPS must be licensed by a National Competent Authority under PSD2 regulations to offer payments initiation services in the EU.
Whether using PSD2-compliant open banking APIs or OBeP schemes’ proprietary bank integrations, the consumer payment experience of being redirected from the merchant’s checkout to their bank is not substantially different. However, PSD2 has opened the way for more payment companies to enter the online bank account-based payments market.
European banks and payment service providers have been developing payments initiation services using open banking APIs from fintechs such as Salt Edge, Tink, Token, TrueLayer, Modulr and Yapily.
Last year, Mastercard selected Token to provide the API connectivity for the Mastercard open banking hub, which connects merchants, retailers and other regulated third parties to European banks for data and payment transactions. In August 2020, Amex partnered with Yapily to launch the American Express Pay with Bank transfer PSD2-compliant service in Europe, having launched the service in the UK in 2019.
Consumer and merchant adoption of PSD2-compliant payments initiation services is at an early stage, and providers need to build relationships with banks and merchants to grow their market share. They also need to offer a full set of merchant services, not just payments initiation.
The now-established OBeP schemes faced the same challenges, but have had longer to overcome them. “We had a slow start when we launched in 2013,” says MyBank MD Tarik Zerkti. “When you launch a network-based payments initiative, you have to ensure that the banks are on board on both sides, and that merchants understand the solution and know about the brand. This all took time.”
According to Zerkti, MyBank processed just over €6bn ($7.1bn) in 2019, and over the last three years the scheme doubled its transactions each year.
iDEAL, which launched in 2005, is now accepted by 130,000 merchants in almost 60 countries. The scheme has 13 million Dutch users and is connected to 60 payment service providers in the Netherlands and abroad, according to iDEAL’s Beugel.
Trustly, which was founded in 2008, offers merchants everything they would expect from card processors in terms of notifications, reports, service levels and transaction reconciliation, says CEO Berglund. “We offer a full online banking payment solution, not a generic payment initiation service which wouldn’t have the features we provide,” he says. “In addition to initiating the payment, our merchant-facing services include refunds, pay-outs, full reporting and reconciliation, as well as foreign exchange and other services across all of Europe.”
Another challenge for payments-initiation services is the lack of governance schemes similar to those operated by card networks. “PSD2 provides a certain amount of customer protection (e.g. Article 73), but there’s no governance scheme as such,” James Black, partner at UK-based legal practice Hogan
Lovells International, says. “Transactions made via PISPs benefit from the same fraud protections as transactions made directly through your bank. This means that the bank is responsible for refunding the user if a transaction is made incorrectly or was unauthorised.” Also, unlike card issuers, payments-initiation services do not offer chargebacks.
By comparison, MyBank has established its own governance regulations. “We have our own legal framework of rules governing the whole scheme, plus a dispute-resolution mechanism and refund policy,” says Zerkti. “So, this isn’t the complexity and Wild West of PSD2, where everyone is trying to connect to multiple different APIs and there are no rules governing the whole scheme.”
MyBank rules include irrevocable SEPA credit transfers and an obligation for payee PSPs to onboard merchants and to ensure that checkout page screens are compliant with what MyBank requires and the correct message is displayed to consumers.
MyBank and three other incumbent OBeP schemes have responded to PSD2-driven competition by collaborating with each other. In July 2020, MyBank, iDEAL, eps and Giropay formed a joint open working group to provide common responses to the demands of the European digital payments market.
“MyBank, iDEAL, eps and Giropay have been in existence for a long time, have a good reach, and offer security,” says Zerkti. “So, we’re working on doing something together in response to the new developments, rather than, for example, MyBank acting individually to sign up banks in Spain or the UK.”
The OBeP schemes’ initiative is a response to recent European developments including PSD2, the European Payments Council’s Request-to-Pay scheme, and the European Payments Initiative, which aims to create a unified pan-European payment solution leveraging instant payments, cards, digital wallets and P2P payments.
“Online Banking e-Payments are natural building blocks for the future of digital payments in Europe and, if applied on a pan-European scale, can avoid further fragmentation and limited geographical reachability of domestic solutions,” the OBeP schemes said in a statement.
Owned by EBA Clearing, a provider of panEuropean payment infrastructure services controlled by 52 banks, MyBank processed €15bn worth of transactions between its launch in 2013 and the end of 2019. MyBank is operated by EBA Clearing subsidiary Preta.
MyBank enables customers to pay for purchases direct from their online or mobile banking apps with their usual credentials, without sensitive data being shared with merchants. They then see a pre-filled SEPA Credit Transfer form, and authorise the bank transfer to the merchant using their bank’s Secure Customer Authentication system.
As it was created before PSD2, MyBank developed a proprietary protocol that it licenses to participating banks. It does not use screen-scraping technology or PSD2-based open banking APIs.
In 2019, travel services payments using MyBank grew by 30% on an annual basis, while utilities payments grew by 41% and telecoms payments rose by 15%. Purchases of technology and IT products rose by 61% in 2019, furniture and home products by 36%, fashion by 29% and food and groceries by 18%.
EBA Clearing’s original vision was that MyBank should be a pan-European version of domestic OBeP services such as iDEAL, eps, or Giropay. “The reality is that we signed up banks in Italy, Luxembourg, Spain and Greece, but didn’t get the markets we wanted,” said Zerkti. “The only country that actively embraced MyBank as a community was Italy, which is why today we’re mostly an Italian solution. We are the iDEAL of Italy and reach over 200 Italian banks.”
Zerkti says that MyBank has not lost its vision of becoming a European solution. “But we understand that it isn’t that easy and that you have to get a community on board, not just two banks in a country, hoping the others will join,” he says. “It’s really a country or community story.”
In addition to banks, MyBank integrates with PSPs such as PayPal and PPRO. “PayPal’s job is to provide as many payment solutions as it can to its merchants,” says Zerkti. “PayPal has a low penetration of consumer wallets except in the UK and the US. So, in order to reach more consumers, it adds smart payment buttons to its checkout including other payment methods such as MyBank and iDEAL.”
Zerkti says MyBank benefits from the global reach of PSPs such as PayPal which have merchants around the world. “This means that Italian customers, for example, can use MyBank to buy from merchants in China or in the US,” he says.
According to Beugel, iDEAL is the most common Dutch online and mobile payment method.
“There are almost 800 million iDEAL transactions per year, with the average value being €80-85 per transaction,” he says.
In July 2020, there were 77.7 million iDEAL transactions totalling €5.83bn, and 86.4% of iDEAL payments occurred via mobile banking apps. In the 12 months to July 2020, the number of iDEAL transactions grew by 31% year on year.
“A secure, encrypted messaging protocol is used between iDEAL issuers, acquirers and merchants,” says Beugel. “The payment may be settled on the next working day, but the iDEAL messaging protocol provides a watertight real-time payment guarantee to acquirers and merchants. There is no single central transaction handling system for iDEAL, as it is integrated in the payment systems of many different issuers, acquirers and PSPs.”
Founded in 2008, Trustly operates in Europe, the US, Canada, Australia and the UK. It differs from MyBank in that it was not set up by banks, although it has bank partners.
“In 2019, we processed SEK132bn ($15.1bn) worth of payments,” says Trustly’s Berglund. “Our revenues rose 58% in 2019 to SEK1.4bn from SEK891m in 2018.”
Trustly is used for online shopping, subscription purchases, airline tickets and bill payments, as well as fund transfers from bank accounts to other types of accounts such as PayPal.
Berglund says Trustly has benefited from the surge in online shopping due to Covid-19, although its airline and travel industry clients have been affected by the drop in travel.
Trustly uses the interfaces provided by banks under PSD2 which can either be open banking APIs or, in the case of banks which don’t offer APIs, their adjusted customer-facing interfaces. “We build and maintain these integrations ourselves, so we don’t use intermediaries,” says Berglund.“Trustly is interface-agnostic.”
Trustly’s pricing depends on factors such as payment volumes and often provides costsavings for merchants, Berglund says.
Trustly uses whatever underlying infrastructure is best for merchants and consumers, Berglund says. “We could use open banking rails in the UK, for example, or intra-bank networks,” he says.
In Europe, Trustly operates its own settlement rails, as it has set up a network of hundreds of European bank accounts to route the payments in the most efficient way. “Our network of merchant funds accounts enables us to optimise settlement speeds,” says Berglund. “We can also ensure payment certainty for merchants when receiving pay-ins, plus instant refunds and payouts to consumers.”
Trustly connects these merchant fund accounts into its system in order to monitor the movements in the accounts in real time. This enables it to notify merchants quickly about payments that have been accepted.
“In Europe, we can use the SEPA Inst [SEPA Instant Credit Transfer] real-time scheme, but also other schemes if fees are charged to the consumer for using SEPA Inst,” says Berglund. “We can also use Faster Payments in the UK or our proprietary network of bank accounts.”
Merchants can either integrate directly with Trustly or through a PSP such as Adyen or WorldPay. “We are a supplier to TransferWise which sometimes uses our network to give its customers the best service,” says Berglund. “You can also use Trustly to top up your PayPal account.”
In 2019, Trustly merged with USbased PayWithMyBank which enables US consumers to pay online merchants from their bank accounts. “PayWithMyBank leverages the ACH infrastructure in the US, but adds a lot of value,” says Berglund.
There are three reasons why Trustly has grown rapidly in the US in the last few years, according to Berglund. “Firstly, we guarantee consumer payments to merchants in real time upon transaction initiation by the consumer,” he explains. “This gives the merchant the certainty of funds that they would get with card payments, which is very important for them.
“Secondly, instead of consumers having to manually enter payment details for an ACH transfer, they just need to log into their online bank account, select the account for payment and initiate the transaction. We have integrations with over 7,600 US banks to enable this easy user experience, which is key, particularly on mobile devices.
“Thirdly, we provide enterprise merchants such as Dell.com with everything that they expect in terms of risk management, reports, notifications, reconciliation, and service levels from card payment processors.”
As there are no open banking protocols in use in the US, Trustly implements proprietary API integrations with US banks. “In Europe, it’s easier to integrate with banks as European banks are moving to open APIs,” says Berglund. “If banks do offer open APIs, we just integrate with these APIs.