With the evolving nature of the payment landscape comes the emergence of newer and more innovative payment methods. One such example of this is Open Banking.
While Open Banking has risen in popularity in recent years, the phenomenon has actually been around for several decades. In fact, this innovation is set to expand significantly in the coming years, with transactions projected to reach US$330 billion globally by 2027. In addition to this, the market is estimated to grow worldwide by 479% between 2022 and 2027.
In this article, we’ll delve into what Open Banking means, how it works, its history as well as the benefits it can provide to businesses, among other things. Keep reading to find out more about how Open Banking is redefining payments.
What is Open Banking?
Open Banking is a protocol that allows customers to use their bank or financial institution to securely share their financial information with trusted Third-Party Providers via APIs. This means customers can pay for goods and services in real-time via instant bank transfers (also known as real-time bank transfers), which is a type of account to account payment.
Unlike traditional bank transfers, which involve the customer’s bank controlling the distribution of financial information, instant bank transfers allow customers to securely transfer funds and easily share selected banking data directly with approved Third-Party Providers.
Open Banking not only provides a secure way for customers to pay for goods and services instantly via their bank account, but also streamlines payments for merchants by facilitating quicker authentication and reducing the number of entities involved in the payment process (more to come on this).
Watch our latest video to discover everything you need to know about Open Banking payments and its main benefits:How does Open Banking work?
Now that you know what Open Banking is, let’s now take a look at how it works below:
- A customer proceeds to the payment page to make a purchase and selects the Bank transfer option.
- They will then be directed to another page, where they will be required to select their bank e.g. HSBC or Barclays.
- The customer is then redirected to their online banking environment to authenticate the payment. To do this, they’ll need to confirm the transaction amount on the payment page in the banking application and complete Strong Customer Authentication.
- After the purchase has been authenticated by the customer, the settlement process can begin. When the actual settlement will happen depends on the agreement the merchant has with their payment service provider.
A quick history of Open Banking
The origin of Open Banking can be traced as far back as the 1980s, when a Screen Test experiment by the Deutsche Bundespost (German Federal Post Office) found that people could make online transfers via their TVs using a specific code.
This study paved the way for the development of Germany’s Home Banking Computer Interface (HBCI) in 1998, which introduced a standard interface for customer self-service, security protocols, message formats and transmission procedures. Later in 2002, this was replaced by Financial Transaction Services (FinTS), which allowed signature cards to be used along with a procedure for PIN/TAN to provide additional security when making bank transfers. For this, customers had to use their PIN to access their accounts, making it safer than previous versions.
In 2004, Sofort was released, which combined HBCI’s capabilities with screen scraping, enabling screen display data to be collected and shared on an application or screen. Specifically, this allowed customers to view their account balance online. When making an online purchase, the customer would provide the non-bank service provider with access to their banking data and login details to initiate the payment.
Three years later, the European Commission launched the Payments Services Directive 1 (PSD1) in 2007. This development aimed to increase competition and innovation in the payment services industry, while providing greater protections for customers in the UK and EEA. Specifically, this directive allowed non-banking entities to execute transactions, alongside introducing SEPA to streamline euro transfers. In 2018, PSD1 was superseded by PSD2, which made it mandatory for banks to allow authorised third parties to access banking data via Open Banking APIs, providing a highly secure way for customers to pay for goods using instant bank transfers.
What are the benefits of Open Banking?
Open Banking not only provides businesses with the opportunity to appeal to changing consumer payment preferences but also offers a variety of other advantages too. Below we outline some of the main benefits of this up-and-coming payment method for merchants.
Improved checkout experience
When it comes to online shopping, providing a smooth checkout experience is of utmost importance and is a key factor for customers when making purchases. According to Statista, 33% of global consumers abandoned online shopping carts due to a confusing checkout experience. In addition to this, 19% of consumers said that they will not follow through with a purchase if they’re forced to create an account. To this effect, Open Banking removes the need for customers to manually enter in any payment details, which helps to significantly reduce the time required to complete a transaction. Furthermore, Open Banking can help to elevate the payment experience of consumers, resulting in lower cart abandonment rates.
Higher transaction acceptance rates
When transactions fail it can be a frustrating experience for both customers and businesses, with this coming down to a number of reasons. The good news is that Open Banking transactions succeed more than 95% of the time. As Open Banking requires no payment information to be entered and is dependent on the cardholder’s account balance, this means transactions are more likely to be successful.
No chargebacks
Chargebacks refer to the process of funds being reclaimed by a customer due to a dispute or improper card transaction, which is enforced by the card issuer. As Open Banking facilitates real-time bank transfers, it essentially mitigates any risk of a chargeback and prevents any additional chargeback-related fees occurring.
Faster refunds
The real-time nature of Open Banking means that customers can benefit from instant refunds. This not only improves the payment experience of customers but also simplifies the process for reversal transactions for merchants.
Reduced fraud
Open Banking is compliant with PSD2’s Strong Customer Authentication (SCA) requirement, requiring customers to complete two-factor authentication within the customer’s banking environment prior to making a purchase. Similarly to card payments, it also utilises APIs as an additional defence against fraudsters, which encrypts and securely submits payment data. The combination of both these measures means Open Banking provides a highly secure way for customers to pay for goods and services.
Is Open Banking secure?
Open Banking is considered to be just as safe as regular online banking. As mentioned previously, this payment method uses APIs to securely transfer payment information. These APIs are regulated by certain payments industry standards (e.g. PSD2) that require certain measures to be implemented to safeguard sensitive customer data like Strong Customer Authentication (SCA).
Further to this, Third-Party Providers (e.g. Open Banking providers and payment service providers) must complete thorough security screenings and meet certain standards relating to data protection. So, in a nutshell, Open Banking offers layers on top of layers of security and is considered to be one of the most secure payment methods.
Accept payments smoothly with emerchantpay’s Open Banking solution
emerchantpay is a global payment service provider and acquirer with over 20 years of experience in making payments easy for businesses. We’re empowering merchants to accept payments seamlessly with our Bank transfer solution.
Bank transfer (Open Banking) is one of over 60 payment methods we currently offer, which also includes Apple Pay and Google Pay™. We’ll work closely with you to map out a tailored payment experience that aligns with your business’ and customers’ needs. Our in-house and global merchant acquiring services means you can accept transactions easily across the globe, maximising your revenue and reach.
Plus, businesses will have access to a dedicated Account Manager and Risk Analyst to help them optimise their payments strategy, with round-the-clock technical support also available. We also offer an advanced real-time, rules-based fraud solution to further mitigate instances of fraud.
Ready to learn how emerchantpay’s Open Banking solution can support your business in maximising its revenue? Contact our team of payment specialists today.
Open Banking FAQs - Frequently Asked Questions
Have questions about Open Banking? We’ve put together a list of frequently asked questions below to help you understand more about this solution.
What does Open Banking have to do with PSD2?
Launched in 2018, Payment Services Directive 2 (PSD2) is a directive used to regulate the online payments industry across the EU and the European Economic Area (EEA).
The protocol represents a significant advancement from its predecessor, PSD1, in that it mandated Strong Customer Authentication (SCA) for online payments. This provided an additional layer of security for both merchants and customers, mitigating instances of payment fraud. Further to this, PSD2 made it mandatory for banks in the EU and EEA to share financial information with authorised third parties via Open Banking APIs.
These measures aimed to revolutionise the banking industry by allowing new entities to enter the sector, promoting competition and innovation.
Open Banking is a protocol that facilitates the movement of financial information between banks and authorised Third-Party Providers. This allows customers to pay for goods and services online instantly via real-time bank transfers. Customers have more control over their financial data by only allowing authorised third parties to initiate payments on their behalf.
Who is responsible for managing instant bank transfers in Open Banking?
Third-Party Providers (TPPs) are authorised financial institutions that utilise Open Banking for different purposes, with different levels of access granted for this data. Let’s take a closer look at each type of TPP below:
- Account Information Service Providers (AISPs): This entity is authorised to view bank account information for advisory purposes but cannot initiate payments or transfers; and/or
- Payment Initiation Service Providers (PISPs): This type of TPP can initiate transactions on behalf of a customer for the payment of goods and services (e.g. emerchantpay). Other examples of PISPs include financial management tools and business solutions.
Further to this, a TPP can function as both an AISP and PISP, depending on the services offered.
What businesses can use Open Banking?
Open Banking is suitable for businesses who want to offer a simple payment experience, which allows them to benefit from bank transfer payments and account top-ups.
How does Open Banking compare to manual bank transfers?
While both involve bank transfers, they each carry this out in different ways. Let’s start by looking at manual bank transfers. This payment method involves a customer logging in to their bank account and manually transferring funds to a business or individual by manually entering in the payee and their payment details.
Comparatively, real-time bank transfers remove the need to log in and enter in any payment details manually, making it a more streamlined method for transferring funds. All a customer needs to do is select ‘Bank transfer’ on a merchant’s payment page, click their bank and then they’ll be redirected to their banking platform to authorise the payment.
Have a question that’s not covered by the above? Talk to our team of payment specialists today.