Open banking payments are transforming the way we make transactions online. By securely sharing data from traditional banks to licensed third-party applications, open banking allows users to make direct payments from their bank accounts, often at cheaper costs and with faster processing times. For businesses, this means lower fees, no chargebacks and happier clients.
In this article, we’ll explore what open banking payments are, how they work, and why they’re increasingly popular among businesses and consumers.
What Are Open Banking Payments?
Open banking payments are a type of direct bank transfers often referred to as pay-by-bank or account-to-account payments. In Europe, they are enabled by data sharing that happens between banks and authorised applications via regulated application programming interfaces (APIs). Unlike traditional payment methods that rely on cards or intermediaries, open banking payments go straight from one account to another.
This process is fast, secure, and requires explicit customer consent, meaning users have full control over their transactions – they can withdraw consent anytime. Open banking is regulated in Europe via PSD2.
How Open Banking Payments Work
Here’s a simple breakdown of how open banking payments work:
- Customer Authorisation: When making a payment, the customer is redirected to their trusted bank’s portal – online or on a mobile app. Here, they authorise the payment directly from their bank account, without needing to insert card details.
- Secure Connection: The payment request travels through a secure API provided by an open banking provider, ensuring data encryption and strict security protocols.
- Direct Bank Transfer: The authorised payment moves directly from the customer’s bank account to the recipient’s account, bypassing card networks and other intermediaries.
- Confirmation: Once the payment is complete, the customer and merchant receive instant confirmation.
Benefits of Open Banking Payments
Open banking payments offer unique advantages that appeal to a broad range of users and merchants. Here are some of them:
Faster Payments
Open banking allows payments to be processed in real time or close to it, reducing delays. Unlike card payments, which can take days to settle, open banking transfers move funds directly between bank accounts. For businesses, this means improved cash flow; for consumers, it means quicker access to their purchases or services.
Lower Transaction Fees
Traditional payment methods, especially card networks, can involve significant processing fees. Open banking payments bypass these networks, resulting in lower transaction costs. For businesses, this can lead to considerable savings over time, especially for high-volume merchants. Consumers, too, may avoid extra fees on certain transactions.
Reduced Chargebacks
For businesses, open banking payments reduce the risk of chargebacks. As they avoid card networks, there isn’t a chargeback mechanism in place. The customers would need to use a refund process if there is a problem with their order.
Stronger Security
Open banking payments come with robust security measures, including encryption, multi-factor authentication, and customer consent at every stage. Because users authorise payments through their bank’s portal, there’s less risk of fraud.
Better User Experience (UX)
The simplicity of open banking payments offers a better experience for customers. They don’t need to enter card details or create multiple accounts; instead, they just authorise the payment through their bank. This process means less friction, making payments quicker and more convenient.
Choosing the Right Open Banking Payment Solution
If you want to start off with open banking payments, it’s essential to choose a reliable OB provider that can meet your business needs. Here are a few factors to consider:
- Bank Coverage: Ensure the provider covers the majority of banks in your region, so customers can use their preferred accounts.
- Security: Look for advanced security measures, like encryption, multi-factor authentication, and fraud detection tools, to protect user data.
- Integration: Choose a solution that integrates smoothly with your existing systems, ensuring minimal disruption to operations.
- UX-friendly: Select a solution that makes the payment process quick and easy for customers, improving their overall experience.
- Compliance: Make sure the solution complies with all relevant regulations, from data privacy laws to industry-specific standards.
Final Thoughts
Open banking payments offer a faster, safer, and more cost-effective alternative to traditional payment methods. They simplify the payment process, reduce costs, and improve security for both businesses and consumers. As more banks and users embrace this technology, open banking payments are set to become the new norm.