Payment initiation, a payment solution with multiple benefits.
Since late 2019, Payment Initiation has been fueling all the conversations related to the payment ecosystem. Will it be able to replace the transfer in the short term, which costs the merchant nothing? Will it one day be able to dethrone the bank card? These are the questions that payment players and e-merchants are asking themselves.
What is payment initiation? To parody a famous advertising slogan from the 1980s, we could say that it is like a credit card payment … without a credit card, and a bank transfer … without entering the recipient’s IBAN.
In fact, the merchant prepares a transfer order corresponding to the amount of the order that the customer only has to validate on his banking application, in a totally secure way. This new payment method is made possible by the application of the PSD2 and its Openbanking component. In practice, when the customer chooses this payment channel, he has to select his settlement bank, authenticate himself with the latter and then give his consent to the SEPA or instant transfer initiated by the merchant.
Client and Merchant Benefits
As this is a new payment method, once the apprehension of the novelty is over, the benefits for the end customer are numerous: he does not have to enter an IBAN, he is not exposed to the risk of an error in the amount, and he does not have to wonder about the wording to be specified to secure the reconciliation of his payment with his order. He can pay up to 100.000 euros without worrying about his credit card limit, he doesn’t have to worry about entering his card data in a system he doesn’t know, he simply pays in a few clicks, in a secure and safe way.
There are also multiple benefits for merchants.
First of all, payment initiation is compatible with a multi-channel payment strategy: online on a computer (PC/MAC) or smartphone, by distance selling or even offline. In the latter case, the payment of a physical sale can be executed by scanning a QRCode, on the salesperson’s screen for example, which will guide the customer to finalize the transaction on his own terminal.
Opportunities by Directorate
For the Finance Department, the first advantage of payment initiation is its cost, “40% less expensive than a bank card” according to a major French bank. It is also popular because it optimizes debt collection procedures.
In addition, in a business with a high average basket (airline, hotel, automobile), payment initiation offers the advantage of better traceability of funds.
In fact, despite the salespeople’s well-established approach to their customers, the accountants are constantly faced with the difficulty of identifying the transfers of Mr. John Smith, who wrote his transaction as “car purchase” without an order reference. Faced with this problem, payment initiation offers the possibility of automating the reconciliation of the payment in the merchant’s information system without manual intervention, and in an instantaneous manner.
For its part, the payment department sees the drastic reduction of fraud and chargeback problems as an obvious competitive advantage. Indeed, unlike payment by credit card, the transfer is irrevocable.
For the product manager, this means of payment also offers many advantages: in addition to its innovative nature, it allows, especially for high average shopping carts, to guarantee a 100% digital purchase path and to chase away the shadow of a shopping cart abandonment. The technical management appreciates the ease of integration of the dedicated APIs.
From the operations department’s point of view, the initiated transfer contributes to the reduction of lead time, since it is irrevocable and the funds are received in less than 10 seconds for instant transfers, so delivery or service execution times can be optimized.
The challenges of payment initiation
Payment initiation seems to represent the ideal payment method: immediate, no fraud, immediately reconcilable, payment limits higher than the bank card. In this idyllic setting, what could be the obstacles to its deployment?
First of all, it is a new payment method that is unknown to the general public, so it is necessary to communicate and exceed the 10% threshold of implementation in e-commerce to consider that the novelty barrier has been lifted.
On the other hand, technically, banking APIs are not yet perfectly reliable, which can lead to service interruptions, and thus harm the customer experience.
It should also be noted that, once the apprehension of the novelty has passed, there is still a significant pragmatic blocking factor that the customer must face: to access the transfer initiated by the merchant, he must enter and therefore remember his customer number… However, this reference is usually pre-registered on his smartphone, which will quickly remove this barrier.
Another pitfall of this payment method is the lack of knowledge of Open Banking: does the merchant have access to the customer’s account?
Finally, how can we be sure that the IBAN is really the merchant’s, and that the customer is not the victim of fishing?
A potential “game changer”
Unquestionably, payment initiation has many advantages for e-commerce players and even for physical merchants. It is a serious alternative to credit cards, bank transfers and checks. It is therefore in the interest of merchants to actively communicate on this innovation in order to accelerate its adoption by their customers. For their part, payment service providers approved for this service (services 7 and 8 of the payment approval issued by the Banque de France/EBA) must continue to invest in their APIs and their lobbying of banks in order to make the service as fluid as possible.
Solvethys is a consulting firm whose partners and associates have a recognized expertise in the field of Fintechs, payment and more globally in the digitalization of financial flows. Solvethys is positioned as the preferred partner of its private and public clients in the optimization of the entire value chain of payment services, whether at the strategic, operational, commercial or technological level.