The open banking landscape is set to reach $330 billion in transactions by 2027. Industry players are propelling such growth by developing new use cases, recurring payments being one that’s potential is yet to be fully unlocked in Africa.
Recurring payments globally have played a key role in modern banking, providing customers with the ability to automate regular expenses, such as bill payments, loan repayments and subscriptions while enabling businesses to establish predictable cash flows. South African retailers, banks and consumers still rely quite heavily on direct debits as a regular payment system, with an average of 31 million transactions occurring monthly. So why should merchants and banks make the shift and use recurring payments?
With Open Banking, a Payment Initiation Service Provider (PISP) facilitates access to the customer’s bank account in order to transfer funds. Recurring payments use a PISP to set up these payments with certain rules and constraints. With direct debit system, a business can pull the regular payments based on pre-authorisation from the customer. Recurring payments differ in that they follow a push-based model which utilizes Open Banking to provide a centralized consent to pay. This method is beneficial because it places the customer at the core of the transaction.
Traditionally, setting up a recurring payment required a time-consuming process involving paperwork, account information or card details, bank approval, and, Debicheck. This process could take several days or even weeks, and changes to the payment schedule or amount typically required additional paperwork and approvals, leading to missed payments, overdrafts, and other financial difficulties.
A less-understood issue in the system is the high cost associated with a failed debit order, which is a significant challenge for businesses. Consumers can be charged up to R100 for a failed debit order, and the business that initiates the debit order is also charged a substantial fee. This cost of doing business is expensive and often inhibits the expansion of financial products to underserved populations.
Open banking recurring payments can be established within minutes, with no paperwork or approval required. Customers simply authorize a third-party provider, such as a subscription service or payment app, to access their account information and initiate payments on their behalf. They can choose the payment schedule, frequency, and amount, and can easily make changes or cancel the payment at any time, delivering greater flexibility and control while reducing the risk of missed payments and overdrafts. Recurring payments in an open banking environment can be an invaluable tool for achieving improved conversion rates for African merchants. This is especially apparent for larger digital players, where a fractional shift in conversion rates will yield significantly large monetary rewards. As open banking payments become the status quo and the industry moves towards incorporating long-term payment options into checkouts, businesses can see higher overall conversion rates.
In traditional banking systems, there are still apparent limitations when it comes to recurring payments, such as slow processing times, inflexible payment schedules, high transaction fees, and risks associated with processing payments without sufficient funds.
Open banking presents a promising opportunity to overcome these limitations. By allowing secure data sharing between financial institutions, open banking empowers customers to authorize third-party providers to initiate payments on their behalf. This has the potential to transform the way recurring payments are made and managed, delivering enhanced convenience, control, and cost savings for both customers and businesses.
For businesses that collect payments using open banking, they can rest assured that the recurring payment request is initiated by the consumer, thereby reducing the likelihood of disputes and the high cost of failed debit orders or card-not-present transactions.
In the next decade open banking is poised to continue revolutionizing the way recurring payments are made and managed. Technological advancements, such as instant payments and tokenization, will enhance the speed, security, and convenience of open banking recurring payments. Potholes can be expected along the way, with potential risks associated with open banking, such as data breaches and fraud, which will require robust security measures and regulations to mitigate.
Open banking is transforming how recurring payments are made and managed. Secured data sharing and payment initiation offer faster transactions, fewer missed payments, and reduced overdrafts—all of which mean convenience, cost-savings, and greater control for customers and businesses. As open banking technology advances, it will be interesting to explore the various ways that it can influence the future of banking.
