In April 2023 the European Payments Initiative, an ECB-backed organization aiming to create a pan-European payment system, announced the acquisition of iDeal, the Netherlands’ leading online payment platform. They plan to integrate the platform into a pan-European online payments standard.
Let’s dive into what iDeal is and how it works to contextualize this bit of news!
What is iDeal?
iDeal dominates online payments in the Netherlands. The system was created by the major Dutch banks to fashion a single system for online payments that could be used by all banks.
In fact, an astounding 70% of all online purchases were done using the payment method in the first half of 2021. In contrast, less than 10% of e-commerce payments in the country were done using cards.
iDeal facilitates account-to-account (A2A) transfers between consumers and businesses. At checkout, rather than entering card details or using a wallet such as PayPal, the buyer selects iDeal as an option and is then redirected to their bank’s online banking portal.
How does iDeal work?
Processing an iDeal payment is not the same as processing a card payment for a merchant. Strong Customer Authentication (SCA) requirements manifesting in the 3D Secure standard for online payments mean that a purchaser can not simply input their card information on a merchant’s website and immediately complete the transaction. For security reasons, the buyer must verify that they intended the purchase. This is usually done in the consumer’s mobile banking app, where an additional layer of authentication is used (usually biometric).
Let’s get down to the nuts and bolts of iDeal’s payment mechanism. First, a buyer authorizes an instant credit transfer to iDeal. From there, iDeal moves the funds to a collecting payment service provider (CPSP) such as Adyen or Checkout.com, who is then responsible for getting the money to the vendor’s bank (acquirer).
iDeal’s ubiquity is based on an excellent understanding of customer UX; it facilitates bank transfers, so is exempted from typical points of friction that impact card payments. And, as one of the top 10 brands in all of the Netherlands, consumers really trust them. When it comes to making purchases on mobile, iDeal’s solution now automatically directs the buyer to their mobile banking app, allowing payment authorization in under five seconds and eliminating any redundant steps.
There is a downside to iDeal, and a significant one at that. In contrast to making payments using a card, where there is a chargeback process guaranteed by the issuing bank, an iDeal payment is final. This means that if a consumer makes a purchase online and the vendor fails to deliver, the only remediation the consumer has is to politely ask the vendor for their money back. iDeal itself does not provide any purchase insurance.
Why iDeal wins
iDeal is a simple company. Their website looks like it is 20 years old and they hardly do any marketing or PR. They outsource merchant interaction almost entirely to third-party acquirers and collecting payment service providers, focusing only on providing payment rails. But their position in their home market is nothing short of dominant.
The company is consistently facilitating over 100 million payments a month and is growing volume (and revenue) at something like 30% YoY.
What are the benefits of iDeal payments? Three words: Simplicity. Familiarity. Trust.
The emergence of online commerce brought with it a need to support a new way of paying for things. Startups, and fintechs in particular, often overestimate the willingness of end users to adopt new technologies. When sensitive data and processes are involved, folks are even more cautious, such as when sending money to a retailer they don’t know personally. iDeal saw this and designed a solution that has familiarity and simplicity at its core.
The user’s interaction with iDeal is designed to be as minimal as possible. iDeal is selected as a payment method within the vendor’s website or app and then the buyer is prompted to choose the Dutch bank they are a customer of. After the choice is made, they are redirected to the bank’s online portal to authorize the transaction. All but one action is done outside of an environment already familiar to the buyer.
The fact that nothing is groundbreaking about making a payment via iDeal is fundamentally why it enjoys considerable adoption. End users want something that is understandable and simply works. In Europe, at least, it is not bells and whistles that win folks in the market over. Instead, people want a reliable and easy to understand way to get what needs to get done, done.
What companies offering financial services can learn
Companies offering payment services who wish to operate more widely can learn from iDeal’s success. The first key takeaway is that in Europe, regulation is a big driver of user behavior. While this is rather true in the US/UK as well, decisions made in EU-wide legislation like PSD2 have had far-reaching consequences.
Interchange fees are limited by European law. This means that consumer card issuers can charge merchants only a tiny percentage fee per transaction (0.20%). In the UK and the US, swipe fees are higher, which finances generous benefit programs such as airline miles and cashback. Without these perks, card usage can be less attractive for European consumers.
On the other hand, the use of cards is hindered by SCA requirements that slow down check-out. In Europe, a purchaser must provide two of the following: something they have, something they are, or something they know. This works flawlessly with Apple or Google Pay but buying something online is not nearly as secure or easy.
In Europe, payment by bank transfer is more than a legitimate competitor to card payments, especially when it comes to e-commerce. Limitations on interchange revenue, security requirements, and dedicated efforts to build a strong European payments network mean that cards simply do not dominate as they do in other markets. Other solutions, such as iDeal, have space to blossom!
The success of iDeal, the preferred Dutch payment method for online commerce, shines a light on what matters to European consumers. Namely, familiarity and simplicity. Clearly, the EPI has taken notice of iDeal’s recipe for success and we will naturally continue to keep an eye on payments in the Netherlands and across Europe more broadly in the coming weeks!