What are open banking payments?
Open banking is a payment gateway that lets you pay online for goods and services instantly. But more importantly, open banking provides you greater security and control over managing your money and data. Open banking also provides a cost-effective alternative to existing card payment schemes.
Open banking allows regulated Third Party Providers (TPPs) to securely access bank account information, but only with the bank account holder’s permission. A TPP is an external company that provides a service or technology as part of a contract.
In the UK, for example, ClearBank is a TPP that offers banking features to its customers through the software-as-a-service (SaaS) model. Open banking was introduced to offer more competition, innovation, and security to the financial services sector.
Open banking payments APIs
Open banking payments are powered by API or Application Programming Interface technology. APIs behave like couriers in passing messages or information from one place to another. In the case of open banking, the couriers (APIs) will securely transmit payment details from your bank account to a Third Party Provider and vice versa.
That way, you skip the need to enter your card details every time. All you need to do is initiate and approve the payment via your mobile banking app or online banking portal.
Payment initiation APIs like open banking use networks like the Faster Payments Systems to make receiving funds quicker, smoother, and cheaper compared to card payments. Even better, payment initiation APIs can be used with technologies like QR codes and near-field communication (also known as contactless) terminals.
Imagine that your bank account is on one side of a river, and a Third Party Provider is on the other. For the APIs to move between the two sides, they will need a bridge. These “bridges” are called open banking companies or payment solutions.
As a one-stop payment platform and solution, Fondy understands the need for businesses from the UK to the US to be flexible and accept various payment methods in a variety of currencies. Want to know more about us? Great! Check out our About Fondy page and discover what inspires us and how that can benefit your business, no matter the size.
Open banking pros for businesses
Firstly, you can use open banking to make faster payments. So, instead of entering your bank details each time you send money overseas, you can fetch them quickly from your online bank account. Open banking is a fantastic option if you need to send urgent, instant bank transfers. Even better, there are no additional fees or forms to fill out.
Secondly, open banking gives you a better picture of your finances. For example, imagine you’re looking for a new car insurance provider if you live in the UK. By sharing your details with a comparison app through open banking, you let the app analyse your income and outgoings. That way, you can save time and money by receiving better car insurance quotes tailored to your individual circumstances.
But it’s not just consumers who are benefiting from open banking payments.
For businesses of all sizes, there are a number of advantageous features of using open banking gateways:
Firstly, you can use open banking to make faster payments. So, instead of entering your details every time you make payments, you can retrieve them quickly from your online bank account instead. Whether it’s receiving or making payments, open banking’s speed is perfect for maintaining good customer service and business relationships.
With open banking, there are no additional processing fees. For merchants that handle frequent payments and large amounts, that means reducing business costs significantly.
Higher conversion rates
According to the Baymard Institute, one in four buyers abandon sales carts because of complicated checkout processes. When you provide multiple and smoother payment methods like open banking, merchants can increase conversion rates and improve customer loyalty.
Open banking payments use bank account authorisation instead of bank account details themselves. In practice, this means that customers can connect securely to their mobile banking to make payments, and no card details are ever shared with the merchant.
Easier cross-border payments
Businesses that hope to expand internationally need to provide ways for customers to pay in their preferred currency and payment method. Open banking is the perfect solution because it features easy currency conversion and local payment options within the checkout process.
Greater cash flow visibility
The instant nature of open banking means that businesses can now have a clearer overview of their cash flow. Traditionally, payment processing times can sometimes give a false summary of a merchant’s finances. Open banking operates in real-time, thereby giving businesses a better look at their cash flow.
Instant refunds are a great way of increasing customer loyalty. And since open banking offers immediate refund capability, consumers can feel more confident that their funds aren’t being processed for days on end. Instant real-time refunds are also beneficial to merchants, as they help them manage cash flow and provide reduced costs and unnecessary paperwork.
The disadvantages of open banking
Although open banking has many pros for both businesses and consumers, there are some disadvantages that come with its technology:
- Old banking institutions struggle to integrate with the new advancements initiated by fintech providers. As a result, customers who bank with these traditional institutions can’t benefit from new technology, such as open banking.
- Open banking is a new concept that many consumers struggle to comprehend. That means that despite its many advantages, there’s still low trust in the way open banking works.
- Less in-person interactions. With most banking transactions taking place online, the rise of open banking means that there’s even less reason to visit banks in-store. For the elderly or those who aren’t IT savvy, this could be seen as further proof not to embrace open banking. And for banking institutions that pride themselves on interpersonal customer relationships, many could start losing their clients to more traditional banks.
The limits of open banking
Change is always good. Where technology is concerned, change is great once you can reassure those involved about their concerns.
Some of the supposed limits of open banking include:
- Lack of awareness – as a relatively new concept, open banking may sound daunting to new customers. That’s because open banking’s USP revolves around the simplicity of sharing customer data with merchants.
- A feeling of intrusion – open banking uses an individual’s financial history to work out whether they are eligible for a range of financial services like mortgages and other types of loans. While an advantage to some, others may find this level of monitoring intrusive.
- Limited human interaction – open banking means that most to all transactions occur online. The reliance on online transactions means that interpersonal relationships are at an all-time low. This, in turn, could lead to reduced brand loyalty and relationships between customers and providers.
- Security worries – free software and applications also come with an increased risk of cyber-attacks. That’s why you should always verify the authenticity of applications before allowing them to connect to your banking data.
Open banking with Fondy
If you need a one-stop payment solution for your business, look no further than Fondy. From multicurrency bank accounts and customisable checkouts to open banking, Fondy makes receiving business payments simple.
Even better, Fondy’s partnership with Yapily means we can provide open banking solutions to businesses of all sizes in the UK and beyond. These features include:
- Eliminating middlemen and unnecessary fees with direct bank payments from one account to another.
- Sending funds to multiple recipients from a single account in one transaction.
- Granting instant access to financial data gives you a complete view of consumer behaviour.
Is open banking safe?
Yes. Open banking uses secure technology like MasterCard SecureCode and Verified by Visa. These are the same innovations trusted by the world’s top banks and financial companies. In addition, open banking only shares information with your permission. And as an extra layer of protection, only apps and websites regulated by the FCA in the UK (or overseas equivalents) can use open banking.
Open banking is especially safe because there’s no need to share your passwords and credentials for merchants to access your financial data. Its secure API technology means that banks and TPPs can provide safe passage for transaction data.