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OPEN BANKING PAYMENT
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Open Banking Payments: A Cost-Effective Alternative to Card Payment
Open banking payment, also known as “Pay by Bank” or “Bank Pay,” is a secure and convenient alternative to card payments where customers authorize payments directly from their bank account, bypassing the need to share card details.
How it works:
- Customers select “Pay by Bank” at checkout.
- They choose their bank from a list and are redirected to their online banking app.
- They approve the payment using their online banking credentials (e.g., face ID, fingerprint).
- The funds are transferred directly from the customer’s bank account to the merchants.
Benefits:
Lower Costs with Direct Transactions
Open Banking payments eliminate intermediaries, allowing funds to move directly between accounts. This streamlined process generally makes them more cost-effective than card transactions. Unlike card payments, Open Banking transactions do not involve interchange fees, PCI DSS compliance costs, or chargebacks, reducing expenses significantly.
Faster Payments, Better Cash Flow
Payments are processed quickly and directly, often with real-time confirmation. Time is money, and Open Banking payments ensure faster transactions for both customers and businesses.
Enhanced security
Open banking payments are quicker, easier and more secure than card payments. You don’t have to key in your card details manually or trust a website to store them for you. Simply select your bank from a list and approve the purchase with your face ID or fingerprint (the merchant can’t store your payment details).
Common Issues of regular Card Payments
Chargebacks: A $31 Billion Problem
Chargebacks occur when a customer disputes a card transaction, leading to a refund. These disputes arise from fraudulent claims, service issues, or non-receipt of goods. Chargebacks cost businesses nearly $31 billion annually, with merchants bearing two-thirds of the financial burden.
A growing concern is ‘friendly fraud,’ where customers fraudulently claim they did not authorize a purchase. Reports indicate that 62% of merchants have experienced an increase in such cases. Each $100 in disputed transactions costs merchants around $35 in losses, including lost goods, administrative expenses, and higher card acceptance fees.
Open Banking payments virtually eliminate chargebacks. Unlike card transactions, which operate on a ‘pull’ basis, Open Banking uses a ‘push’ mechanism, where funds are transferred with explicit customer authorization. This removes chargeback rights, saving businesses time, money, and administrative effort.
A growing concern is ‘friendly fraud,’ where customers fraudulently claim they did not authorize a purchase. Reports indicate that 62% of merchants have experienced an increase in such cases. Each $100 in disputed transactions costs merchants around $35 in losses, including lost goods, administrative expenses, and higher card acceptance fees.
Open Banking payments virtually eliminate chargebacks. Unlike card transactions, which operate on a ‘pull’ basis, Open Banking uses a ‘push’ mechanism, where funds are transferred with explicit customer authorization. This removes chargeback rights, saving businesses time, money, and administrative effort.
False Declines: A $20.3 Billion Issue
False declines—where legitimate transactions are mistakenly rejected—cost businesses in France, Germany, the UK, and the US an estimated $20.3 billion annually. These occur due to overly cautious fraud detection systems used by various entities in the payment chain.
Open Banking payments reduce false declines by simplifying the transaction process. With fewer intermediaries and a more secure authentication process through banking apps, businesses experience fewer incorrect rejections, improving transaction success rates.
The Hidden Costs of Card Payments
Accepting card payments can be costly. Interchange fees—often calculated as a percentage of each transaction—make card payments particularly expensive for high-value transactions.Regulators in the UK, Europe, and the US have repeatedly investigated interchange fees. In 2015, the EU capped these fees at 0.2% for debit cards and 0.3% for credit cards. However, post-Brexit, major card networks increased fees for online transactions between the UK and the EU to 1.15% for debit cards and 1.5% for credit cards.
Beyond interchange fees, businesses accepting card payments must comply with stringent data security standards (PCI DSS), adding further costs. Open Banking payments eliminate these expenses since customers authorize payments directly within their banking apps, reducing the risk of data breaches.
Open Banking VS. Card Networks: A Comparison
While card payments offer convenience for both in-store and online transactions, they come with drawbacks such as high fees, lower success rates, fraud risks, and slow refunds—particularly frustrating for consumers.
As outlined above, card payments involve a lengthier and more complex process than Open Banking. Here’s how they compare across key features:
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