Open banking has definitely been a buzzword lately. But it’s also so much more. Open banking is power handed back to customers and merchants, it’s the democratization of financial services. It’s also the way banking institutions are updating their legacy systems to empower easier transactions and financial operations. In this article, we’ll explore what open banking is and what it can do for merchants worldwide.
What Is Open Banking?
Open banking (or open bank data) is a framework that allows regulated third-party financial service providers (or TTPs, such as payment providers) to access consumer banking information (e.g., transactions, and financial history) and even perform actions on behalf of the account holder through APIs. In layman’s terms, open banking allows customers to initiate payments seamlessly and businesses to receive settlements in seconds.
Although we will be talking about open banking as a good payment method to offer for all online merchants, it is important to keep in mind that it can be used for a variety of other purposes. For example, open banking APIs can be used by companies to verify the identity of a prospect.
If you like your history, you might have heard of PSD2. PSD2 (or Revised Payment Services Directive) is the regulatory framework that kickstarted open banking in Europe. You can read more about how open banking and PSD2 are related in this article.
Where is open banking available?
Open banking is a domestic phenomenon since every country or region implements its own form of open banking (e.g., Pay Now in Singapore, New Payments Platform in Australia, UPI in India, PSD2 in Europe, Faster Payments in the UK, Pix in Brazil). It's currently available in 58 countries, with more countries rolling out a form of open banking every year.
Why Is Open Banking Relevant? (The Statistics)
We understand that some of you need to see hard and fast data to believe that open banking is making an impact. Well… here you go.
As this report by Statista shows, over 71% of financial experts in Europe have positive feelings towards open banking.
In addition, Europe and Asia have over 42 million open banking users projected in 2022, which shows users’ trust in the system. While some regions show lower adoption, the overall adoption rate should grow by nearly 50% YoY (via Statista).
Do you need further proof that open banking is on the rise?
This data shows that open banking is becoming a trusted and viable alternative to traditional financial tools everywhere in the world. For example, many users would rather perform instant payments straight from their bank account rather than go through the trouble of using a credit card. Oh yeah, did we tell you that direct transfers between banks are among the fastest-growing payment methods in Europe?
How Do Open Banking Payments Work?
It's really straightforward. The consumer gives the TTP permission to access their banking details, and the TTP does so through the open banking APIs. If the TTP offers Payment Iteration Services (PIS), it can connect to the customer's bank account and send the payment to the merchant without inserting any details.
Now in plain English: every user can initiate a payment from their bank account to the merchant's bank account seamlessly and in real-time. Neither party has access to sensitive financial information, enhancing security while cutting payment processing fees. Easy-peasy. Lemon. Squeezy.
We could break down open banking payments into three steps:
- At checkout, the user chooses to pay via bank account
- They choose their bank
- They are redirected to their banking app for authentication. That’s it!
The Main Benefits of Open banking
It’s easy to see that there are many benefits to open banking, but we put together the main ones in a list so you can view them all in one place:
- No sign-up is required. Virtually everyone has a bank account, and that’s all customers need! No apps, no registrations
- Innovation. As a new technology on the rise, open banking is focused on innovation and answering the needs of the public. This means a thriving tech sector dedicated to making financial operations easier, and an ever-growing customer base to tap into. Currently, data shows that the top three priorities for open banking (according to employees in the financial and payment sector)
- Improve customer experience
- launch new digital services
- Increase revenue
- Seamless. As we described above, paying with open banking takes only three steps, and the authentication process is the same as users use for their banking, hence they are familiar with it
- Control of data and finances. Better apps and services mean that both customers and merchants are not limited any longer by what's offered by their banks. Anything from budgeting to loans and payments can be supercharged by the smart use of open banking
Open Banking Vs. Card Payments
Okay, let’s start comparing payment methods! Open banking promises to shake the omnipotent credit card market by eliminating some of the worst pain points faced by credit card users and merchants:
- No chargebacks and faster settlements. Once the money is in the merchant’s bank account, there is no chance of chargeback and related costs. With credit cards, you normally have to wait 30 days before the funds get settled into your account, whereas in many, many countries open banking settlement happens within 10 seconds (Pix settles within 2 seconds!) Some countries are still taking longer, but open banking technology is evolving very fast
- Up to 85% cheaper. Not having to pay for credit card fees and having lower payment processing costs means that both merchants and customers will save money compared to credit card payments
- Faster checkout and unified journey. We’ll compare the checkout journeys in the next paragraph, but open banking encompasses fewer steps and more familiar redirects for authentication
- More secure. With open banking, you don’t have a card that can be stolen or card numbers that can be captured, hence the risk of fraud is significantly lower. Also, Truelayer reports that the success rate for open banking payments is over 95%, while credit cards sit at around 85%
- New markets. Users from certain geographies (like Latin America and South East Asia) historically don’t like to use cards but show high adoption rates for open banking.
- Faster settlements. This depends on the country or the bank, but in general open banking settles faster than credit cards. With the latter, you normally have to wait 30 days before the funds reach your account. With the former, it can happen within 5 to 10 seconds. As previously touched on, Pix in Brazil settles within 2 seconds! Some banks may take longer depending on geography.
Now, let’s compare the payment experience of open banking vs credit card. As we’ve seen, open banking is a three-step process:
- Choose to pay via bank account
- Choose the bank
- Authenticate through the bank’s app
Paying with a credit card entails almost twice as many steps:
- Choose to pay by card
- Input 16-digit number
- Input 4 or 6-digit expiry date
- Input 3-digit CVV
- Go through 3D Secure authentication
Keep in mind, that with credit card payments users may have to go through the whole process multiple times in case of typos, while it’s impossible to have typos with open banking.
Will Open Banking Kill Cards?
Most likely, not. In fact, the payment instrument behind any digital transaction (including wallets) is almost always a card. Nevertheless, as Tink data shows, open banking can improve the customer experience (with a payment session lasting less than 45 seconds), reduce CNP fraud, and increase the success rate of payments (conversion rates for returning users are over 90%). Should you get rid of your card processor? No, but adding the increasingly trustworthy open banking to your payment options is definitely the smart move to make.
Open Banking Vs. Manual Bank Transfer
Open banking payments are similar to standard bank transfers, in that they move funds directly from one bank to another. Where open banking shines is in the flexibility and customer experience.
Although it is possible to offer standard bank transfer as a payment method (for example through BlueSnap), you need to wait for your customer to log in to their bank portal and insert all the details manually, whereas with open banking it is all done automatically through an API! The same manual operational burden regarding manual bank transfers is to be considered when it comes to reconciliation.
Top Choices for Open Banking Gateways
If you want to offer open banking in your checkout, you need to use a regulated third-party provider. Here are the top ones (by the way, they are all integrated into BridgerPay):
Open banking is a technology on the rise. It is rocking the payments market with its innovation-first approach and has yet to reach its full potential. Merchants would be wise to include an open banking option in their checkout for several reasons, from improving the customer experience to saving on transaction fees.
Do you want to learn more about open banking? Watch the online event we hosted with Volt, a leading open banking gateway, connected to over 5000 banks worldwide.