Creating a truly cashless society

The future of payments has long been touted as cashless. But throughout the COVID-19 crisis, this shift towards a cashless future became a reality, with cash payments swiftly falling out of favour due to fears of spreading the virus.

As we start to move beyond the pandemic, it’s clear that contactless has replaced cash as the easy, and preferred, way for the majority to pay. In fact, nine in ten face-to-face payments in shops are now made using this method, according to Barclaycard research from April 2020.

Why we need open banking to get payments networks up to scratch.

This move to cashless should be welcomed. But it also puts a part of the payments ecosystem under much needed scrutiny. We need faster and more secure ways to pay digitally. But the traditional card rails are giving businesses a raw deal. For this move to cashless to succeed, we need the adoption of open banking principles and digital wallets to be accelerated. Because it is only with enhanced security and a new digital payment network in place that the cashless economy can truly be realised.

Card rails give businesses a raw deal

While the cashless society promises to bring numerous benefits to both consumers and businesses, the payments network used to process these payments is no longer fit for purpose.

Card payments, made through point of sale (POS) systems, are still reliant on age-old card rail networks, which can often be slow, insecure and expensive – costing businesses, the majority of them small and medium-sized enterprises (SMEs), up to 4% in merchant fees.

Added to this, merchants don’t receive funds from customer purchases instantly, often waiting up to two days to do so, and are forced to have separate bank accounts for transactions with various card issuers. Given the current state of the economy, not instantly receiving their money from card companies is having a serious detrimental impact on businesses that are struggling to keep afloat. If they don’t have access to all of their liquidity at any one time, it makes it more difficult for them to manage their cash flow. Ultimately, card rails are preventing businesses from bouncing back.

Further, millions of businesses fall victim to fraud each year in the UK, and traditional card rails are exacerbating this problem. While inputting passwords, banking details and card numbers into online sites to make payments is generally safe, “card not present” fraud –  where someone else’s card is used to make a payment without the card being physically to hand – has become the go-to for criminals. Employees making orders for necessities such as office supplies are now 81% percent more likely to fall victim to this type of fraud than point-of-sale fraud, according to Shift Processing research from June 2020. And a recent study from UK Finance found that last year this totalled £470.2 million.

Added to this, merchants who fall victim to “card not present” fraud who have used traditional card rails face a long, expensive and drawn out process when trying to recuperate lost funds. The ripple effect of this type of fraud is significant – third-party suppliers, customers and merchants can all be left out of pocket.

Open banking gets payments up to scratch

Open banking can, and already is, providing a more reliable and scalable way to access essential digital payments infrastructure than these traditional card rail methods.

The vast majority of card payments have fees at several points along the journey for merchants, acquirers and issuers. Payments using open banking will significantly help towards eradicating these fees. While it’s unlikely that we will ever see feeless transactions, open banking will broaden the payments market, and we will see both percentage-based models and fixed fee players. This will create much-needed competition and lead to future payments innovations – all to the benefit of merchants and ultimately consumers on the high street.

Harnessing open banking also enables merchants to consolidate their company accounts, as they will only need one for all transactions – thanks to being able to directly access customers’ accounts to reconcile payments via a single secure open banking application processing interface (API). This in turn will reduce the administration burden of tracking cash flow and increase liquidity across the business.

Further, open banking is secure. It was built on systems that had already developed principles such as Strong Customer Authentication (SCA) like mobile banking applications, rather than trying to improve old methods. This means open banking inherently helps to mitigate the risk of fraud. The SCA requires that all electronic payments be performed with multi-factor authentication. So open banking payments are covered by default. This adds a significant layer of security and removes several types of fraud including “card not present”. Gone are the days of having to type in long card numbers or remember a PIN.

Creating a fair cashless society for all

It’s important that as we move beyond the COVID-19 crisis, we create a society that is fair for all. At a time when digital transactions are only set to grow, we need secure, diverse and reliable infrastructure underpinning our financial services. Harnessing a single, open banking API, banks and financial services providers can access the data they need to enrich their end-users’ experience. And merchants can stop handing over their hard-earned cash and liquidity to card companies.

Looking beyond enhancing payments, open banking principles will also enable customers and businesses to receive personalised financial services and advice; removing the barriers and inefficiencies involved in lending, money management and accounting as well as payments. This will ultimately pave the way to a world of greater financial control and wellbeing for all.

This is why we need to speed up the adoption of open banking, digital wallets and the availability of Payment Initiation Service Provider (PISP). Along with enhanced security, with this new digital payment network in place, instant payments become safer and easier for consumers, and significantly cheaper for merchants. A win-win for all.