New dawn of payments – Open Banking, wallets and crypto
by Gosia Furmanik on October 26, 2021
It’s a new dawn, it’s a new world…. In the evolution of payments. Our existing payment system (based on Mastercard and Visa rails) was built in 50s and 60s of the last century. There has been a certain level of innovation introduced to the card payment ecosystem like contactless payments or digital wallets, nevertheless the underlying infrastructure remains the same.
The rapid technological change has opened the payments space ready for disruptions. Users used to great UX, and convenience provided by tech solutions in other areas expect the same from their banking apps and payment methods.
Technology is not the only factor responsible for recent changes and new additions to the payment ecosystem. The regulatory framework, especially in the EU and the UK, has spruced up the speed of innovation in the financial sector. The regulators in those jurisdictions actively enforce more competition and through regulatory changes. The biggest recent overhaul of the payment regulation was PSD2 which came to life in 2018.
Open Banking payments
What are Open Banking payments?
The newest kid on the block – Open Banking payments is one of the latest developed payment methods. It combines bank transfers with APIs between banks and interfaces provided by a third-party. In practice, you can make payments using your online banking for goods and services online and in-store with pre-filled bank transfers. It takes advantage of free, instant transfers between bank accounts.
How does it work?
The third-party provider will build an application that connects to banking APIs to enable payments and account information data extraction.
Essentially, consumers can pay directly from their bank account to a merchant’s bank account in as seamless way as if they paid with a digital wallet. This allows it to bypass the current card rails system, saving merchants card processing fees.
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eWallet is effectively an account accessible via an app. The differences between traditional bank accounts and e-wallets are mostly in ease of use and competitive fees for customers, especially around FX and foreign money withdrawals.
eWallets are not regulated to the same extent that banks are; however, they are supervised under the e-money license. This means the account number and sort code services behind the e-money licensed apps are provided by a bank. Typically, traditional banks lack good UX and flexible features; hence users’ willingness to try ewallets.
eWallets often come with perks like low or no fees and extra features like stock or crypto trading.
Where did eWallets emerge from?
You might ask what else triggered the proliferation of eWallet providers? Relatively easy access to IBAN and account number services enabled the popularisation of digital wallets. The emergence of regulatory changes like introduction of the emoney license was also a factor in the increased adoption of ewallets.
Digital wallets have brought greater choice for users – both on a consumer side as well as on the business side.
QR code payments
What are the QR code payments?
QR code payments are simply a way to communicate payment links between consumers and merchants. QR codes often lead to an online checkout where consumers can pay for goods or services.
What’s under the hood for QR code payments?
QR code payments often work like ecommerce payment connected to cards and ApplePay/GooglePay wallets. Effectively they replace physical terminal payments with digital equivalents. The main drawback of QR code payments is that they only work online. It means Internet access is required to process a payment.
What is crypto?
Crypto currencies are decentralised digital tokens that can be exchanged in the form of a payment. Crypto currencies are built on decentralised networks like blockchain or Ethereum.
Usually, crypto currencies consist of a string of letters and numbers that can be transferred between holders in lieu of payments. Crypto currencies can be stored on digital wallets or offline on hardware wallets.
One of the biggest attractions of crypto currencies is the anonymity of users when making payments. They are not regulated by any financial authorities; hence there is no obligations for standard KYC/KYB and AML checks as with regulated payment methods.
Some of the key drawbacks of crypto currencies include:
High volatility – many cryptocurrencies’ values fluctuate quite significantly. It often makes it uneconomical to use for payments.
Non-reversible transaction – all cryptocurrency transactions are non-reversible so any mistakes cannot be rectified easily.
Prone to hacking – As in recent times cryptocurrencies have increased in value, it makes them an attractive target for hackers.
Not most intuitive or seamless – in the current state, crypto payments are fiddly and not as seamless as cards/wallet payments. It prevents less tech-oriented people from using it.
ePound, eEuro or eYen?
Central Banks all over the world are grappling with the issue of crypto currencies
As custodians of the monetary systems in their respective countries, central banks are feeling the pressure to keep up with the unsupervised cryptocurrencies.
Many central banks, including in China, the EU and the UK, have started working on developing their own digital currencies. In the future, residents of those jurisdictions would be issued with digital currencies directly by central banks. They will also be stored on digital wallets managed by central banks.
This payment method hasn’t been developed yet but could be a game changer.