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Pay by bank payment processing for UK businesses

Kieron James Kieron James - 10th Jul, 2024

Open banking powered Pay by Bank is a game-changer for online payments.

Challenging traditional online banking, instant pay by bank transfer opens new gateways for e-commerce businesses to deploy a payment method with advanced features. Are you looking for a convenient checkout process that’s more secure, cost-effective, and facilitates account-to-account payments? Pay by bank is the ideal solution to grow your online business while providing a seamless experience to your customers.

Let’s take a quick look at the evolution of bank payments, the influence of mobile and online banking solutions, the mechanisms and implications of open banking, and the potential of Pay by bank to redefine the future of online payments. ‘Wonderful,’ which offers a pay-by-bank app, API and e-commerce integrations, is at the forefront of this revolution.

Traditional bank payments and transfer methods

Traditional bank payments have been trusted online banking solutions for decades in the UK. From routine bill payments to large-volume corporate transfers, they have formed the backbone of the financial system in the country, with periodic modifications over the years. So, if conventional bank account payment methods provided safe transaction platforms, why was it necessary to introduce modern technologies like Pay by bank in the realm of online bank payments?

To understand the dynamics, let’s understand the mechanisms of traditional methods.

  1. BACS (bankers’ automated clearing services): BACS, established in the 1960s, is a critical element of the UK's financial infrastructure. It’s primarily used for direct debit and credit transactions, including salary payments and utility expenses. BACS transactions are typically processed on a three-day cycle, making them less suitable for urgent payments but highly efficient for scheduled, recurring transactions. This system is a trustworthy method when it comes to cost-effectiveness and transactional security.​
  2. CHAPS (clearing house automated payment system): First introduced in 1984, CHAPS processes same-day payments for high-value transactions within the UK. Large business-to-business payments or real estate purchases are ideal scenarios that benefit from using CHAPS as a chosen A2A payment method. However, the transaction must be initiated within a stipulated cut-off time to allow same-day payment. A costlier alternative to BACS, it scores due to its faster settlement time, a necessity for high-value deals.
  3. Faster payments: Faster Payments, launched in 2008, catered to an increasing demand from business enterprises in the UK for quicker payments by permitting almost immediate bank account transfers. Unlike BACS, Faster Payments processes transactions in two hours. This 24/7 service benefits individuals and corporations due to its speed and operational convenience.

Pay by bank: Smarter payment solutions for smartphones

Smartphone technology has significantly transformed the e-commerce experience, including online payment processing. New mobile banking solutions for businesses include modern payment methods, such as Pay by bank, which bypasses card networks and helps businesses save significantly on transaction fees. Biometric verification and two-factor authentication decrease fraud threats, ensuring safe transactions for businesses and consumers.

Additionally, mobile payment solutions integrate effectively with POS, inventory, and CRM systems, easing operations and giving data-driven insights on sales and customer behaviour. Businesses may make decisions backed by key analytics and plan better with these systems. Mobile payments are convenient and scalable, allowing businesses of all sizes to adapt and expand.

Powered by Open Banking

How it works and is my data safe?

Open banking is all about sharing financial data securely with authorised third-party payment providers. This data sharing is facilitated via secure APIs, so authorised payment providers (regulated by the FCA) can integrate different financial services. The user's online bank account credentials, or more typically, biometric access to their mobile banking app, are used to quickly authenticate the payment in a trusted environment when they initiate a Pay by bank transaction.

Further, customers can use open banking services to analyse financial data to accelerate and improve decision-making. The open banking framework ensures that data is shared within a safe digital environment, which increases the overall efficiency of the financial ecosystem.

What does open banking mean in the UK?

Let’s look at how real-time payments are reshaping UK businesses.

There are stringent, multi-layered compliance mandates that Pay by bank providers like Wonderful strictly follow. This reduces the possibility of fraud through greater security of business data and increased consumer trust. Strong Customer Authentication (SCA) is inherent in open banking payments, which dispense the need for CVVs, postcodes, one-time passwords (OTPs) and similar measures introduced to improve payments made via cards (a payment method introduced decades before e-commerce was even considered!)

With real-time payments, consumers have greater flexibility in deciding which information to share, which makes the transaction experience smoother for them, and consent lies with them. Open banking’s cutting-edge features, such as pay-by-bank transfers, empower businesses to streamline operations and provide a better customer experience, which is pivotal to sustained business growth. This API-enabled mechanism seamlessly integrates with existing legacy systems, which mitigates significant investments in technology upgrades.

Is there a standard API to connect to bank accounts?

One of the key benefits of open banking is the standard, which mandates the biggest UK banks to provide access to regulated fintechs (like Wonderful) to connect and initiate payments - again, with the explicit consent of the customer to do so. These APIs make it easy for regulated financial service providers to access and work with bank account information, allowing them to offer a variety of services like payments and financial planning.

●     Open banking APIs: Open banking regulations in the UK require banks to provide standardised APIs. With the help of these APIs and customer consent, pay-by-bank apps are able to initiate payment transfers. Open Banking Limited (OBL) is entrusted to regulate the security and interoperability of the APIs.

●     PSD2 APIs: In the EU, banks are now required by the Revised Payment Services Directive (PSD2) to open up their payment services and customer data to third-party providers using APIs. This rule is in the best interest of end users, making online payments and account access safer for everyone in the UK. PSD2-compliant APIs allow for services such as account information aggregation and payment initiation, which help to further integrate FinTech solutions with traditional banking systems.

●     Commercial API providers: Emerging organisations, such as Wonderful, Plaid, Truelayer and Yappily, offer APIs that integrate with a wide banking network in the UK. The unified interface of these APIs allows software developers to custom-build specific financial platforms that can access bank information, verify available balances, and initiate payments in a safe environment.

●     UK open banking standards: The UK Open Banking Standard is a set of guidelines and specifications that ensure that open banking APIs are super secure, reliable, and simple to use. This standardisation makes things a lot easier for third-party providers and banks, which in turn makes it convenient for fintech companies to develop and offer tailored financial services.

Pay by bank vs. A2A payments vs. Digital wallets

While traditional account-to-account payments have been an important part of bank transfers, digital wallets have added a new dimension to online payments since the launch of Google Pay in 2011. Now, with the growing popularity of open banking, pay-by-bank transfers are gaining momentum. Let’s understand how Pay by bank differs from older payment methods.

Cost-effectiveness

Bank transfers: Traditional bank transfers like CHAPS charge a significant transaction fee for faster processing.

Digital wallets: Certain digital wallets may charge for fund deposits, currency conversions, and withdrawals. They may further charge a percentage on each transaction.

Pay by bank: It usually has lower transaction fees because it skips the traditional card networks and handles payments directly between banks. This is beneficial for both businesses and consumers, as firms can save big on transaction fees and pass on the benefits to their customers.

Transaction speed

Bank transfers: BACS takes up to 3 days to transfer funds to the merchant's account. Though CHAPS processes payments within two hours, it has a substantial fee.

Digital wallets: Typically, digital wallets provide instant transfers within the same wallet. It may take longer to transfer to another wallet or bank account.

Pay by bank: Pay-by-Bank apps provide real-time settlement (typically just a few seconds) across multiple networks at a reduced cost.

Security

Bank transfers: Highly secure platforms, but multi-layered security checks make the process cumbersome.

Digital wallets: Despite robust security measures like encryption and biometric authentication, digital wallets are susceptible to cyberattacks.

Pay by bank: Pay by bank ensures a highly secure transaction environment by utilising bank-level security features such as two-factor authentication and secure API calls. Stringent regulatory compliances make them more secure than digital wallets, while maintaining other superior features compared to bank transfers.

Interoperability and integration

Bank transfers: Manual entry of account details for every transaction makes them less compatible with the modern e-commerce environment.

Digital wallets: Integrate seamlessly with most e-commerce platforms.

Pay by bank: The ease of integration through APIs and their interoperability with existing financial systems make them an ideal choice for modern-day online businesses.

Wonderful

Wonderful, a popular UK Pay by bank provider, helps businesses accept payments straight from client bank accounts effortlessly and affordably. The platform processes payments in real time over a secure network and integrates with many e-commerce systems, such as WooCommerce payment gateways. Wonderful is a trusted name among UK enterprises and consumers as it comes with multiple advantages of the open banking system.​

Trustly

Pan-Europe Pay by bank service provider Trustly is a popular choice in the UK. It lets consumers pay from their bank accounts without a card or separate app. Many online retailers and consumers use Trustly for its fast transaction times and strong safety features.​

GoCardless

GoCardless specialises in direct debits and recurring payments, using Pay by bank. It simplifies direct bank account payment collection for businesses, minimising transaction fees and enhancing cash flow. GoCardless is popular with subscription-based services and organisations that require frequent payments.​

Is Pay by bank the future of payments in the UK?

The UK has been at the forefront of the adoption of Pay by bank solutions in Europe. Regulatory pushes like Payment Services Directive 2 (PSD2) are driving this trend as they mandate open banking practices. The UK's Competition and Markets Authority (CMA) has stepped up by enforcing rules that encourage direct bank payment expansion. Their efforts are creating an inviting space for this type of financial service. Let’s look at some of the statistical insights:

  1. Growing consumer adoption: Open Banking reveals that 1 in 9 people in the UK has adopted the Pay by bank method for online payments. This is driven by the safety and convenience of open banking platforms like Wonderful.
  2. Small businesses are leading the way: Due to its enhanced operational efficiency and cost savings, small businesses are quickly turning to this payment method. About 17% of small enterprises in the UK have joined this payment revolution.
  3. Significant growth in transaction volume: The volume of open banking payments has increased significantly, with 9.7 million transactions recorded in June 2023 alone, representing an 88% increase from the same month in the previous year. The approximately £4.5 billion total monthly value of this payment method serves as a reminder of its significant economic impact. The global scenario also looks promising, a study from Juniper research has found that open banking transactions will grow from $57 billion in 2023 to $330 billion in 2027.
  4. The younger generation is the early adopter: Like most technological revolutions, younger consumers are moving towards Pay by bank. Research published on Tink suggests about 12% of the population in the age bracket of 18-34 has shown a strong preference for faster and safer modes, like Wonderful’s Pay by bank platform.

Technological developments, regulatory support, and rising acceptance rates point to a bright future for Pay by bank solutions. Key drivers include improved security and efficiency, strong regulatory support from authorities such as the FCA, and the expansion of use beyond retail into industries such as insurance and utilities. Furthermore, the global growth of open banking efforts in regions such as North America and Asia is expected to drive the broad adoption of Pay by bank solutions, altering how we conduct online transactions.

FAQs

What is FCA and how do I know if a company is FCA registered?

The Financial Conduct Authority, or FCA regulates UK financial transactions to ensure transparency and integrity. The FCA's online register of individuals and organisations can be used to verify a firm's registration. They also list the firms' permitted operations.

What are the two types of FCA authorisation for firms?

Firms can be authorised by the FCA in two ways: full authorisation, which is necessary for firms carrying out regulated activities, and limited authorisation, which applies to firms carrying out lower-risk activities that do not require full authorisation, like a credit broker.

What is the suggested payment method for a website?

Online buyers prefer multiple payment options. Hence, a user-friendly e-business should maintain various payment options, including Pay by bank.

Are there payment methods I can use with no payment fees?

Pay by bank is one of the most cost-effective online payment solutions that may even come without fees for some organisations.

What is Pay by bank and how it helps save big?

With Pay by bank, clients can avoid using their credit cards by making direct transfers from their bank accounts. In addition to lowering transaction fees—which can be as low as 1p per transaction—and reducing the likelihood of fraud and chargebacks, it helps save a significant amount of money for businesses and customers alike.

Photo by Tech Daily on Unsplash

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