Earlier this year, I blogged about Online Banking e-Payments (OBeP) solutions which allow consumers to pay merchants online directly from their bank accounts via online banking channel (e.g. iDEAL in the Netherlands). I mentioned that eWise and VocaLink have announced their partnership to launch such a solution in the UK market and shared my thoughts on some of the challenges the solution would have to overcome. Lately, I had a closer look at OBeP payment methods in general and the plans for the UK specifically, and I have just published a report titled "Would OBeP be iDEAL for the UK Market? A Guide For the Decision Makers", which explores the feasibility of OBeP-type solution in the UK. To evaluate a new payment solution, I proposed a framework which considers three most important constituents in determining the success of any FI-led payment product - consumers, merchants and financial institutions - and asks the following questions:
- Why would consumers get the payment product?
- Why would consumers use the payment product to transact?
- Why would merchants accept the product?
- Why would Financial Institutions offer the product?
The framework proposes a series of success criteria important to the corresponding party, categorised along the three major steps in the payments value chain - payment instrument provision, transaction and post-transaction activities. Having applied the framework to OBeP, I concluded that OBeP can be a very attractive payment instrument for all major parties, particularly merchants. However, in the UK, given the dominance of cards and, increasingly, PayPal, it is financial institutions that hold the key to the success of OBeP. Their consumer and merchant relationships and willingness to invest in shifting consumer payment habits will be crucial in creating the necessary network effects. In order to make a decision on OBeP adoption, the UK banks should, among other things, develop a business case, which takes a holistic FI perspective and explores multiple scenarios for key revenue and cost drivers. In particular, it will be important for banks to draw their own conclusions on the expected sources of OBeP transactions (i.e., incremental to cards or replacement of cards), the future of card interchange, and the expected growth and business model of PayPal and other similar solutions. If the UK banks do get behind OBeP, the UK e-commerce payments landscape could change significantly over the next few years.
