Running an online business is no small feat. You face high transaction fees, chargebacks that eat into your profits, and customers abandoning their carts at checkout. Every friction point in your payment process can cost you sales.
That’s when open banking payments come in – a faster, cheaper, and more secure alternative to traditional card payments. With open banking, you can streamline transactions, improve customer experience, and reduce costs.
This guide will break down how open banking payments work, why they’re a game-changer for merchants, and how they stack up against card payments.
What Are Open Banking Payments?
Open banking payments allow customers to pay directly from their bank accounts. Instead of relying on card networks, open banking uses APIs to securely connect customers with merchants. Open banking was made mandatory in Europe by the PSD2 regulation in 2018.
This API data sharing eliminates the need for intermediaries like card schemes, reducing costs and speeding up transactions. Customers simply authenticate their payment through their bank’s interface, and the funds are transferred instantly to the merchant.
How Open Banking Payments Work
Open banking payments are powered by API technology. Here’s how the process unfolds:
- Customer Initiates Payment: At checkout, the customer selects the option to pay by bank.
- Bank Authorisation: The customer is redirected to their banking app or online banking portal, where they log in securely.
- Payment Approval: The customer reviews and approves the payment.
- Instant Transfer: The funds are transferred directly from the customer’s bank account to the merchant’s account, often within seconds.
Benefits of Open Banking Payments for Merchants
One of the most significant advantages of open banking payments is the cost savings. Card networks charge high fees, including interchange and scheme fees. Open banking bypasses these networks, offering a more cost-effective solution.
Secondly, chargebacks can be a nightmare for merchants, both financially and operationally. Open banking payments are authenticated directly by the customer’s bank, making them irreversible. This eliminates the risk of fraudulent chargebacks.
Customers no longer need to input lengthy card details or worry about expired cards. They’re redirected to their trusted banking interface, making the process fast and familiar. This streamlined flow reduces friction and boosts conversions.
With a smoother checkout process, customers are less likely to abandon their purchases. Faster authentication and fewer steps mean fewer distractions and more completed transactions.
Open banking uses strong customer authentication (SCA) and bank-grade security protocols. This ensures that every transaction is secure, protecting both merchants and customers from fraud.
Open Banking Payments VS Card Payments
| Open banking | Cards | |
| Cost | Lower fees with no card network costs or chargebacks. | High fees, including interchange, processing, and chargeback fees. |
| Speed | Instant transfers mean immediate access to funds, | Settlement times can take days. |
| Security | No chargebacks. Strong authentication reduces fraud risk. | Vulnerable to chargebacks. |
| UX | Customers authenticate directly through their bank, simplifying the process. | Requires card details, which can expire or be mistyped. |
How Open Banking Payments Drive Growth
1. Boosts Conversion Rates
Friction at checkout is one of the top reasons for cart abandonment. By offering a seamless and fast payment option, open banking platforms help merchants close more sales.
2. Builds Customer Trust
Customers feel more secure when paying directly through their bank. This trust can translate into repeat purchases and long-term loyalty.
3. Supports Scalability
As businesses expand into new markets, the ability to handle cross-border payments efficiently becomes crucial. Open banking platforms make this easy, reducing complexity and costs.
What to Look for in Open Banking Platforms
When adopting open banking payments, it’s important to focus on key factors that align with your business needs.
Integration is crucial – seek platforms that offer seamless compatibility with your e-commerce systems, whether through APIs or plugins. Bank coverage is another essential consideration; the platform should connect to a broad network of banks in your target regions.
Prioritise user experience by choosing a provider that offers simple and intuitive payment flows for customers. Security features are non-negotiable; ensure the platform adheres to regulations like PSD2 and employs strong customer authentication.
Why Now Is the Time to Switch
The payments landscape is changing, and open banking is at the forefront of this transformation. Customers expect faster, more secure payment options, and businesses that fail to adapt risk falling behind.
By adopting open banking payments, merchants can reduce costs, enhance security, and deliver a better experience for their customers. Whether you’re looking to cut transaction fees or boost conversions, open banking platforms offer a modern, scalable solution.
