Last week’s newsletter covered the iDEAL payments system in the Netherlands. I received a number of responses with feedback and clarifications which are included below.
Resilience to Fraud
iDEAL has low levels of fraud due to the strong controls over both parties in a payment.
iDEAL payments are initiated only through strong customer authentication provided by banks. It is very difficult for fraudsters to get past this by breaking through online/mobile bank controls, unlike, for example with cards which can be counterfeited, stolen or hacked to initiate a card payment.
iDEAL payments may be received only by retailers and billers who have a contract with a PSP - an acquirer or a CPSP (collecting PSP). All retailers and billers go through a know-your-business onboarding process with their PSP. This process is required by iDEAL, including measures and standards (e.g. website quality) that ensure only trusted retailers/billers are onboarded. These are screened before connecting to the network, against a risk profile (low, medium, high) and afterwards are monitored on their risk profile and their transactions. Consumers resolve any issues such as non-delivery, poor quality, over-charging, directly with a retailer/biller. Where a retailer/biller has been reported by a user and found to have acted fraudulently (e.g non-delivery of purchased items), the retailer/biller is struck off and deleted from the iDEAL system.
Originally, PSPs were responsible for monitoring retailers/billers and transactions, but this is now done centrally by iDEAL (on the iDEAL 2.0 platform). iDEAL ensures consumers are reimbursed for any fraud, paid by the respective bank (depending on the case and on the precautions the consumer has taken). Funds are recovered from the retailer/biller’s bank account. iDEAL also publishes a list of fraudulent websites and links to a police list of rogue traders.
Authorised push payment (APP) fraud is very low, perhaps non-existent on iDEAL due to the tight control over retailers/billers and their small subset of bank accounts. There are around 350,000 retailers/billers to monitor and control, as opposed to tens of millions of bank accounts.
Card networks have similar stringent requirements for onboarding retailers and billers, but fraud at scale still occurs due to unauthorised card transactions. Consumers are protected through the card chargeback mechanism, but retailers/billers are liable for each chargeback even if the fraud is outside their control, which they loathe. In contrast, with iDEAL, any fraud is traceable directly to a retailer/biller and losses can be recovered from them.
Success Factors
Stakeholders and stakeholder management – demand for iDEAL was driven by stakeholders such as web retailers. Strong stakeholder management and serving the needs of banks, PSPs and retailers is core to iDEAL and its governance.
Ecosystem harmony – there is strong cooperation by the licenced PSPs on the common infrastructure in adhering to the rules & regulations and to the scheme governance. The ecosystem is managed and regulated well as a whole, with all participants compliant with the scheme rules & regulations, overseen and checked by iDEAL’s operator (originally Currence, now EPI).
Low costs - the iDEAL scheme has been low-cost from the start, making it attractive to retailers and billers. It was built on existing technologies – the SEPA credit transfer and internet banking. The only new capability in 2005 was a new protocol connecting a retailer website to its bank to the consumer’s bank and back. No expensive and complicated infrastructure was built.
An effective fee structure - iDEAL has a relative low fee for retailers/billers compared to other online payment methods and no fee for consumers. Debit card fees in the Netherlands, including interchange, for in-person and point-of-sale payments have always been low, providing a benchmark for low fees when iDEAL was set up. iDEAL has always been priced on a fixed fee per transaction, with no ad valorem fee, reflecting the low risk of iDEAL payments.
Origins
When iDEAL launched in 2005, initially there were just three banks backing it who became the shareholders of iDEAL.
The main reason the banks built iDEAL was due to a request from the home shopping association, Thuiswinkel to build a single online payment system covering all banks. This was to replace existing systems individual banks had built, resulting in websites with separate technical payment connections to each bank. It was complex for the retailers to implement and manage multiple bank connections, no doubt the user experience was also complicated and the retailers had the inconvenience of negotiating separate contracts with each bank.
Use Cases
The last published figures showing where iDEAL is used were for 2020. That year, Dutch ecommerce accounted for 26% of all iDEAL payments by value, 14% from purchases on foreign websites, 21% form consumer-to-consumer payments and 39% from other transactions such as bill payments.
Although Tikkie is a popular consumer-to-consumer payment request app provided by ABN Amro, other Dutch banks also support consumer-to-consumer payment requests which are paid through iDEAL.
Acceptance Network
Currently, iDEAL does not use instant payments end-to-end from consumer to retailer/biller. PSPs have separate agreements with their retailers/billers covering when funds are credited to their bank account. Typically, funds are credited to the retailer/biller at the same time as those for other payment methods provided to the retailer/biller by their PSP.
Retailers/billers accepting iDEAL have a contract with their PSP to use iDEAL as a payment option rather than directly with iDEAL. Smaller retailers in general opt for a CPSP to get a package of services including a set of payment options (e.g Visa, Mastercard etc) and technical implementation services.
The most recent annual report 2022 (published in October 2023) shows 349,032 retailers offered iDEAL, split 300,318 from the Netherlands (86%), 48,714 from other countries (14%).
Comparison with Open Banking
The main difference with open banking payments is that iDEAL is a regulated open scheme adhered to by PSPs, whereas open banking is a payment initiation mechanism. Compliance with scheme rules & regulations and technical requirements is checked by the iDEAL operator (previously Currence, now the EPI).
With open banking there is no open banking scheme or operator dedicated to managing it (however, in the UK, a central body, Open Banking Ltd standardises APIs). Originally, the iDEAL platform used bilateral connections to banks using XML, the upgraded platform (iDEAL 2.0) is designed for uniform API connections with all PSPs.