Paying to online merchants via your bank?

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24 August 2010
Zilvinas Bareisis
In the last couple of weeks, there have been a few announcements in the US and the UK about new ways to pay for e-commerce goods - via your online bank account. SafetyPay announced its formal entry to the US market and eWise, a company behind Secure Vault Payments in the US, announced a partnership with the UK's VocaLink to develop a similar offering. They both promote a payment method, which takes the customer from an online merchant site to the customer's online banking site, from which the customer can make a payment to the merchant. The attraction to the customer is that they don't have to disclose the card details and they are safe in the knowledge that their payment has been authenticated by their bank. The merchant receives a guaranteed payment and in return pays a processing fee, which is shared between the payment provider and the bank. Such payments are reasonably well established outside of the US and UK - iDeal in the Netherlands and giropay in Germany are just two very popular examples. So, surely, the US and the UK must be ripe for these types of payments? I am not so sure though. I think these solutions will face a two-fold challenge: 1. Consumer adoption. Both the US and the UK have well established card markets, both debit and credit. Add PayPal into the mix and the consumer has a decent range of payment options online. Will they trust another unknown brand, even if it's backed up by their bank? Just as some might be reluctant to enter the card details online, will they find it equally unnerving to type in their online banking credentials based on a link generated by an unknown online merchant? And will they find the whole process more convenient than paying by card? I doubt it... 2. Bank adoption. iDeal succeeded because the Dutch domestic debit card (PIN) had zero interchange and most of the cards could not be used online. Here, the new providers will have to convince the banks that it's a good idea to cannibalise their card interchange fees for an alternative revenue source. Having said that, in the post-Frank-Dodd act world, these alternative revenues might actually be quite attractive. I would love to hear your thoughts on this. What do you think about payments online and specifically these new products?


  • NACHA’s / eWise’s Secure Vault Payments OBeP (Online Banking ePayments) network concluded its 18 month pilot in January 2010 during which it attempted to answer the questions that you rightly pointed out. Studies showed that over 17% of people who could use SVP used the payment method and 48% of people used it more than 5 times over a 12 month period, 22% using it more than 8 times. Consumers are moving towards debit based payments that offer them more control of funds, ease use and greater security for payments online. Studies showed that a typical OBeP transaction takes around 15-20 seconds compared to a card transaction in excess of 60 seconds. Consumers can see what funds are available at the time of the transaction and get to choose which account to pay from: checking, savings or a credit account offered by their trusted financial institution.
    A consumers’ primary account is their checking account, known as a current account in the UK. This account is generally used to make all their payments including payments to their credit card, utility bills via ACH, (BACS or Faster Payments in the UK) and even payments to PayPal. Consumers want to manage their finances from a single account and not have to open and manage multiple 3rd party accounts that ultimately link back to their checking account.
    OBeP solutions around the world, like SVP, are industry led initiatives designed to create a payment solution specifically for the online world unlike card schemes which were originally conceived for the physical world and adapted for the online world. Most payment methods online are like handing over your wallet to the merchant, the merchant pulling a payment out of your account and hopefully handing your wallet back (or storing the wallet information securely). OBeP solutions are similar to cash payments online: the consumer, via their bank, sends the money to the merchant and like cash it has a payment guarantee. No need for the consumer to hand over his wallet or personal information. No need for the merchant to store and protect any sensitive information and incur the associated costs and reputational risks if the data is lost. The consumer is still protected by the Network and its Financial Institution participants
    As far as bank or Financial Institution adoption is concerned FIs are looking for new ways in which to generate new revenue streams which they own. We know that Card interchange fees are under pressure and overdraft fees are declining. We have seen a raft of non industry payment solutions coming into the market and reducing the industry market share of payments, not only taking revenue but customer relationships as well (both consumer and Merchant). OBeP solutions are not only designed to protect this loss of revenue but to help grow revenue by helping convert paper based payments to electronic payments. Card revenue cannibalization is always discussed with participating FIs but most recognize that the threat of losing revenue completely to other payment methods is greater than migrating revenue within an FI. Steps must be taken to protect revenue leaving the institution.
    You rightly pointed out that these OBeP payment types are reasonably well established outside of the US, at last count OBeP solutions were offered in over 15 countries with an estimated 100+ million active users. The most well established network, iDEAL now accounts for nearly 50% of all online payments and less well established schemes are showing similar growth patterns. Clearly each country does have different consumer and market demands and their adoption will differ.
    Given that OBeP networks leverage an FIs existing infrastructure and customers base– online banking authentication, cash management and Treasury management services (ACH), the investment for banks to participate is relatively low in comparison to the opportunity. Once the OBeP solution has been integrated FIs online banking customers can use it from day one – no registration or ongoing maintenance by the consumer – another plus as far as the consumer is concerned, and the bank can generate revenue from its entire customer base from day one.
    In the UK the OBeP initiative objectives are similar: grow, regain and protect online revenues but also help meet industry goals of increased usage of Faster Payments (real-time payments), deploy alternative industry sponsored payment methods to help eliminate checks by 2018 and offer consumer choice.

  • The jury is certainly still out on the consumer adoption issue in the US and the UK and only time will tell. OBeP networks have to work with the network participants, Banks and Merchants, to promote and educate their customers about the benefits of the solution. You are absolutely right in saying that there has to be a compelling reason why consumers switch payment preferences and our consumer focus group studies have shown that simplicity and ease of use are top of the list as motivators followed by a sense of security. However, I believe that a feeling of security has to be present before the ease of use factor comes into play. Through the ICPNO, an organization established to create rules and standards for global interoperability of OBeP networks around the world, new OBeP networks can understand how established networks have dealt with such issues and address them during the early phases of their establishment.

    As far as the replacement of cheques in the UK is concerned, I don’t think there is any one solution that will replace cheques. We see OBeP networks helping drive payments from paper to electronic and addressing some of the issues as to why people still write cheques (to make cash-like payments with control over when they are paid and the ability to easily reconcile the payment at a later date). Clearly there are different drivers for consumer issued cheques and business issued cheques. The industry is looking at a number of ways to address the objective and our discussions with organizations like VocaLink, whom eWise is partnering with to launch the UK OBeP network, believe that this can help achieve the goal.

  • The ability to pay online merchants via online banking is certainly an interesting model that has experienced success in specific markets. However, I don’t believe that it will ultimately be a mainstream channel for many of the reasons that have been highlighted above. It’s worth considering the fact that alternative payment options such as iDeal appeal to consumers who have an inherent anxiety or cautiousness about payment security online. As a result, asking these individuals to trust a link generated by the merchant is a tall order, as Zilvinas states in his first post. And it requires them to trust their banks.

    iDeal has the support of virtually all merchants in Holland and is effectively a national monopoly but in markets such as the UK and US where there is an array of payment service providers and lower levels of trust in the banking system, it is hard to see how this situation will be replicated. Instead there is movement towards more variety rather than less, witness the growing appetite amongst financial institutions and end users to use virtual prepaid cards when making transactions online. The customer experience mirrors that of credit and debit card use which means that consumers are in their comfort zone from day one but with a greater sense of security and no need to use a completely new infrastructure. Virtual prepaid cards will never be the sole solution but they will be an important way of paying because of the peace of mind they offer.

    PSE Consulting predicts £2.3 billion in prepaid card transactions in Europe by the end of this year; it would interesting to see statistics that show whether this growth is happening and how much of it is for online purchases.

  • Good POST...The adjudicators is definitely still out on the customer implementation issue in the US and the UK and only time will tell. OBeP networks have to work with the complex participants, Banks and Merchants, to encourage and educate their customers about the remuneration of the solution. You are absolutely right in saying that there has to be a persuasive reason why consumers switch compensation preference and our consumer focus group studies have shown that straightforwardness and ease of use are top of the list as motivators followed by a sense of security. However, I believe that a feeling of sanctuary has to be in attendance before the ease of use factor comes into play. Through the ICPNO, an institute established to create rules and standards for global interoperability of OBeP networks around the world, new OBeP networks can understand how established networks have dealt with such issues and address them during the early phases of their institution.

  • [...] this year, I blogged about Online Banking e-Payments (OBeP) solutions which allow consumers to pay merchants [...]

  • Richard, many thanks for your thoughtful and detailed comment - it clearly sheds a lot more light on this interesting solution and its likely path to adoption.

    I completely agree with you that some banks will recognise that they are better off cannibalising their card revenue themselves than leaving it to others, but as you say, this discussion is always on the table and I am sure most banks will want to develop their own business case. Of course, as we both pointed out, the card revenue is under threat in many markets, including the US and the UK, so exploring alternative revenue sources is a must.

    I also agree that if we were to start from scratch, an OBeP solution might be a more elegant and natural way to pay online than cards. In highlighting the consumer adoption challenge, I am merely emphasising the power of habit - if as a consumer I already have a "good-enough" method to pay, the alternative solution needs to have an obvious incremental value for me to switch. I am sure some customers will clearly see that value (as you say, 17% of the SVP pilot obviously did so), but I do think the habit in others might be more difficult to break.

    Finally, I was intrigued by your last comment that one of the objectives of the OBeP initiative in the UK is to help eliminate cheques by 2018. I am keeping an eye on various solutions in this area and would be curious in what kind of scenarios this solution could replace cheques?

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