New financial services products can help retailers and shoppers choose how goods and services are paid for online and in-store
Traditionally, unless a retailer had an agreement with a merchant acquirer – which, in turn, was linked to a card scheme such as Visa or Amex – the retailer could only accept cash payments from buyers. Those days are long gone and the overwhelming majority of merchants now accept payment by card.
While card payments are reassuring for shoppers, accepting card payment can be costly for retailers. The UK payment systems regulator is taking action to address the issue and improve the card acquiring market, and recently organized a consultation on how to improve the functioning of the market for retailers.
However, there are ways for retailers to get better card acceptance services. New payment technologies allow retailers to bypass merchant acquirers and find other ways to accept payments from shoppers. So what are the advantages and disadvantages of two of the most common alternative payment methods: buy now, pay later (BNPL) and open banking?
Buy now, pay later
In recent years, an increasing number of retailers have redesigned their payment pages so that, in addition to choosing to pay by credit card, debit card or a prepaid offer, the customer can choose to pay in installments. These BNPL options are a credit product and involve the buyer repaying a debt to a lender over a period of time.
Some BNPL products are already regulated and subject to the controls of the Financial Conduct Authority (FCA). However, in recent years there has been an increase in the use of unregulated BNPL products. These unregulated products are controversial, but have proven popular, especially with younger generations. They can help buyers spread the cost of purchases over a few months; retailers generally see an increase in basket size and are not exposed to credit risk; and (unlike other credit products) lenders’ fees are primarily paid by the retailer, not the buyer, which can therefore be a lucrative, low-risk market for lenders.
Consumer groups and the FCA are concerned about the rise of unregulated BNPL products.
- Often buyers have not understood that it is a credit and an entirely different way to pay for their purchases.
- Not everyone uses unregulated BNPL products within reasonable budgeting; there are concerns that these products fuel impulse purchases.
- Although individual items purchased may be of relatively low value, the cumulative effect of purchasing multiple products in this manner can quickly add up and become unaffordable.
These concerns were flagged in the Woolard review, which recommended that the FCA steps in and further regulates BNPL arena to better protect consumers.
Her Majesty’s Treasury has ended consult on the measures to be taken and should publish its proposals shortly. It seems likely that more (but not all) BNPL products will soon be regulated, so lenders will need to be licensed (if they aren’t already) and the relationship between lenders and buyers will be tightly controlled. However, it is not yet clear how any new regulations will affect retailers: will they have to become authorized agents (known as “designated representatives”) of lenders in order to include BNPL’s offerings on their websites? Will a special diet be designed for them?
Fintech has become a huge catalyst for change in transactional environments. As fintech has developed, so have the payment options available to shoppers and retailers. This change was particularly evident with the introduction of open banking.
Regulatory changes in 2017 paved the way for open banking by allowing new categories of regulated providers to access bank or e-money accounts held by their customers at other financial institutions; these regulated providers are able to offer financial services to their customers even if the customer is banking elsewhere.
For merchants, alternative payment offers from Payment Initiation Service Providers (PISPs) are likely to attract interest. PISPs can initiate payments directly from their customers’ bank or e-money accounts at other financial institutions as long as they have that customer’s consent to do so. In the retail context, this means that a buyer can use the services of a PISP to make a payment to a retailer (via the PISP) directly from the retailer’s bank or e-money account. buyer without the need to use a debit or credit card.
There are clearly a few benefits for retailers to route payments this way:
- PISPs can offer a low-cost solution for retailers and shoppers compared to card payments, which involve various layers of fees for retailers.
- PISPs offer shoppers the ability to make purchases online even if they do not have a payment card, thereby opening up accessibility.
- Retailers typically receive payments faster through a PISP, improving cash flow. Payments are made directly to the merchant’s bank account without the need to go through international card systems, so the settlement process is much shorter.
- Arguably, payments made through a PISP are more secure because buyers do not pass their credentials to the retailer or its payment gateway and processor.
However, using PISPs for payment presents some challenges:
- Unlike payments made by credit or debit cards, where a buyer makes a payment using a PISP, the buyer will have no chargeback or refund rights under Section 75. This may let the buyer get paid if there is a problem with the goods or services acquired from the retailer, particularly if the retailer has become insolvent in the meantime.
- Many PISPs have business models that target retailers (who are the beneficiaries of the transaction). However, their contractual relationship is actually with the buyer and it is to the buyer (the payer of the transaction) that a PISP owes all of its regulatory obligations. Retailers should keep this disconnect in mind when considering PISP marketing materials.
In any event, the use of open banking products as an alternative to card payments is on the rise in the UK. By the end of 2021, 26.6 million open bank payments had been made, an increase of more than 500% in 12 months, according to the industry organization. the Open Banking Implementing Entity.
Commentary by Osborne Clarke
The pandemic has demonstrated that shoppers are ready to adopt new practices and technologies in order to continue purchasing goods and services. Retailers shouldn’t be afraid to adopt a similar approach in order to benefit from a seamless and profitable payment experience.
Innovative providers bring new technologies and products to market, which also forces incumbents to up their game. Exploring alternative payment methods that bypass card payment rails entirely, retailers can benefit from new fintech offerings and get a better deal from online and in-store payments.