“Open banking acts as a secure bridge, enabling you to share financial details with businesses, ensuring clear and efficient transactions.”
This is an exclusive interview with Eric Shoykhet, CEO of Link Money, a US-based open banking payment platform. In this enlightening discussion, Shoykhet delves into the intricate web of America’s credit card dependency, shedding light on the historical factors that have fostered a reliance on this financial tool.
As we navigate through the interview, Shoykhet unveils the consequences of this entrenched credit card culture, exploring its impact on consumer spending habits, responses to inflation, and the burgeoning issue of credit card fraud.
The conversation takes an insightful turn towards the Credit Card Competition Act (CCCA), a potential game-changer aiming to reshape the landscape dominated by major credit card networks.
Furthermore, Shoykhet offers a critical examination of the safety and drawbacks of Buy Now, Pay Later (BNPL) schemes, setting the stage for a compelling discussion on the merits of open banking as a secure alternative to credit card payments.
Join us on this journey as we unravel the complexities of American finance with Eric Shoykhet at the helm.
Why are American consumers so reliant on their credit cards?
Eric Shoykhet: The American consumer’s entrenched reliance on credit cards is not an accident.
There has historically been little incentive to offer consumers any alternatives to credit cards, as incumbents benefit from the US having the highest payment processing fees in the world. As a result, we’ve grown accustomed to spending above our means and relying on money we don’t yet have.
This applies to our response to inflation, too. According to PYMNTS, “individuals with credit cards are utilizing them more extensively in response to the heightened inflationary environment. In fact, the more severe the inflation, the more consumers rely on credit cards for expenses.”
How much does credit card fraud cost American consumers? How much does it cost merchants?
Eric Shoykhet: According to the Federal Trade Commission, American consumers lost $8.8 billion to fraud in 2022 – 30% more than in 2021. This number is only expected to grow as hackers become more sophisticated.
WalletHub reported that each dollar lost to fraud in 2022 cost merchants $3.75. That’s an increase of almost 20 percent since 2019.
What are some other issues surrounding credit card fraud?
Eric Shoykhet: In addition to being costly to both the merchant and the consumer in money and time (being on a call with your credit card company regarding unauthorized charges is not an experience anyone looks forward to), credit card fraud is also disruptive.
Customers need to be sent a new credit card, which generally means that all recurring payments running off of that credit card get stopped and must be transferred to the new card.
This churn means that many customers forget (possibly incurring fees) or just cut off subscriptions entirely (which merchants want to avoid).
Can you tell us about the Credit Card Competition Act?
Eric Shoykhet: The CCCA aims to increase competition by requiring big banks to give merchants a choice when it comes to which networks they use to process credit card transactions.
The aim of the CCCA is to reduce the dominance of Visa and Mastercard, who recently raised their processing fees. Ultimately, that hike could cost merchants more than $500 million annually.
Do you believe the CCCA will hurt or improve payment security?
Eric Shoykhet: I do not believe that it will have much impact on payment security, though there are arguments that it could have an adverse impact on network security.
Namely, routing decisions would be shifted from banks to merchants; network security is variable among merchants, as demonstrated by several recent high-profile hacking incidents. However, the chance of CCCA passing remains low, so all of this is fairly academic.
Is BNPL a safer alternative to credit cards? Are there any drawbacks?
Eric Shoykhet: No – BNPL has myriad serious systemic problems. While it may not involve the same level of fraud as credit cards, BNPL is risky for vulnerable consumers and extremely expensive for merchants. The BNPL business model is built on extending high-risk loans.
Basically, it is a business of offering subprime loans for every-day consumption. If consumers fail to pay, their credit scores can very quickly and easily suffer.
What’s a safer alternative to paying with credit cards?
Eric Shoykhet: By leveraging automated clearing house rails (ACH), open banking provides a faster, easier and more secure alternative to traditional card payments.
Pay by bank offers benefits to businesses by minimizing processing fees as well as expenses brought on by fraud. For consumers, open banking payments provide enhanced security and peace of mind, all while promoting a healthier approach to personal finances.
Please provide us with an overview of open banking.
Eric Shoykhet: Open banking is a secure method by which consumers can share their financial data with third-party businesses.
It utilizes application programming interfaces (APIs) to allow third-party access to consumers’ financial information as well as facilitate transactions.
Where is it being utilized?
Eric Shoykhet: Not all consumer transactions are suitable for open banking payments.
However, open banking is ideal for repeat purchases with transaction amounts above $10 to $15 per transaction, an approach that targets e-commerce platforms like Amazon; subscription-based services like Netflix or Spotify; parking spaces; storage units; insurance providers; and charities or government entities where regular payments occur, for example.
Currently, open banking is widely used in other scenarios where consumers have gotten comfortable linking their bank account, like using a fintech app to link one’s bank account to their brokerage account.
How does this ensure safer payments vs credit card payments?
Eric Shoykhet: Credit card usage opens consumers to different types of fraud, including identity theft, skimming, chargebacks and phishing.
Conversely, open banking provides several layers of protection, including encryption; two-factor authentication; permissions to access user data; and a process that does not require users to share login credentials.
Why hasn’t open banking taken off in the US yet?
Eric Shoykhet: The US has about 10,000 banks, and other markets – like the UK – are very concentrated. Because of our large market, which is fragmented due to the number of merchants, merchant acquirers and processors, it takes more time to roll out new technologies.
There is also less consumer interest in adopting new types of payments. Credit cards are convenient, so they’re less likely to recognize the incremental benefits of real time payments.
On the merchant side, there has been little incentive to provide alternatives to credit cards. However, once merchants realize the savings they could see with pay by bank, they will no doubt begin to drive adoption.
How can we change that?
Eric Shoykhet: Pay by bank will largely be merchant-driven by their desire to save money. Adoption will come primarily from merchants who can incentivize customers through discounts, cash back or rewards programs.
Further, as a market-driven country, the adoption of open banking payments in the US will also fall on innovators in the space.
Eric Shoykhet is CEO of Link Money, a US-based open banking payment platform.
