Traditionally, after an online purchase, the payment information provided by the customer at checkout is first transmitted to the merchant. In turn, the merchant forwards these details to its acquiring bank, responsible for processing the payment.
At that point, the bank sends all the payment information to the customer’s card network (Visa or Mastercard, for instance), which then contacts the customer’s bank to approve the transaction.
If the bank accepts the transaction, it sends an authorisation code through the card network to the acquiring bank, which in turn communicates with the merchant. After receiving that confirmation, the merchant finally provides the customer with the acquired product or service.
Through these various exchanges, the different parties involved would all charge a percentage-based fee on every transaction. For merchants, this translates into non-negotiable costs: the interchange, assessment, and processing fees required to be able to accept card payments from customers.
The new approach of open banking.
Open banking is proving to be a threat to the current online payments model as well as a huge opportunity for merchants, both digital and brick-and-mortar. In a market where financial data can be accessed by any regulated business – even merchants themselves, as long as they are licensed – more and more companies will start bypassing the traditional intermediaries to have their customers paying directly into their business accounts.
Those companies willing to embrace the opportunity, but not ready to invest the time and resources to become a financial regulated third party, will be able to count on the new players within the payment ecosystem, effectively able to facilitate the whole process: the Payment Initiation Service Providers (PISPs). These online entities can access a customer’s payment account and initiate the transfer of funds on his or her behalf – as long as the customer grants them permission to do so.
A PISP handles everything from authentication and authorisation to all the instant decisions and exchanges described for the card payment process, making card schemes redundant, and allowing the issuing bank to pay directly into the merchant’s bank through a more agile process.
Here is what the process would look like. At checkout, the customer accesses his or her bank account directly from the online store interface to authorise a request for sending funds to the merchant (also known as a push payment). This request travels through the PISP, which then exchanges information with the customer’s bank, initiates a payment from the customer’s account and sends the money via the interbank payment network directly to the merchant’s business account.
In this approach, the PISP facilitates an interaction only involving three parties: the customer’s bank, the customer and the merchant. The merchant’s bank plays no role in the exchange and simply receives funds once the payment is settled.
Therefore, all the interchange fees required by the traditional intermediaries are completely removed from the equation, leaving merchants with better margins to enjoy while avoiding long settlements of funds, and the associated risk of declined transactions and chargebacks due to fraud or an inability to collect funds.
Where’s the catch?
Meeting the required standards to access the new abundance of financial data provided by open banking and leverage it to develop your own payment solutions is a costly process, which requires time and very skilled resources. This poses a few challenges for those companies willing to embrace the innovation. However, such obstacles can be easily tackled by picking the right financial partner.
Finshark brings to life an entirely different approach to online payments. We provide non-financial businesses with a solid and ever-growing financial infrastructure, the required technical resources, and our bespoke solutions to start accepting account-to-account payments from customers of thousands and thousands of banks throughout the European market.
Would you like to know more about how to add an account-to-account solution into your payment mix? Get in touch, ask questions, and share your challenges with us.