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What is an open banking payment?

Carmen James Carmen James - 10th Feb, 2022

Open Banking technology promises to change how we pay for things and how we manage our money, but what exactly does it mean to pay using Open Banking?

Open banking vs open banking payments

Open banking: Open banking is a secure way for consumers to give merchants or service providers access to their financial information or to authorise a payment directly from their bank account, usually via a third party.

Open banking payment: This is an account-to-account (A2A) payment, where the payment moves directly from the payer’s bank to a merchant’s bank.

How exactly do Open Banking payments work?

  • Open banking depends on APIs (application programming interfaces). APIs enable software to speak to other software.
  • APIs are effectively the instructions on how a third party can access data from a bank (account holder’s name, account type, currency, personal details).
  • These payments are completed securely and only with the sender’s consent.

Tell me why I should use open banking payments?

The growing digitalisation of payments has been driven further by the coronavirus pandemic, with 52% of payments made via card. The increase in maximum transactions for contactless payments has also steered society towards the convenience of digital payments. Open banking doubles down on this convenience by going above and beyond through:

  1. Simplicity: Consumers only have to authenticate themselves once to give permission to an Open Banking payment initiation service, then they can easily pay directly from their bank account every time, without having to enter card details or enter further credentials.
  2. Speed: When they utilise instant payments capabilities, open banking payments allow funds to be transferred immediately.
  3. Trust: Customers feel more secure when they can select a familiar, trusted route to make a payment. There’s nothing more familiar for most than using their own bank account and their usual bank login.

Open Banking payments

Card payments

Cost to merchant*

From 4p / transaction

From 1.4℅ +20p / transaction

Settlement speed

Instant via Faster Payments

1-3 days

User experience

Good. Automated, mobile first, made for digital, integrated into checkout.

Good when websites store information, otherwise manual data entry required.

*For illustrative purposes, open banking cost based on commercial rates. Card costs based on current rates set by popular card payment provider, Stripe.

Are open banking payments safe?

Bank-level security – Open banking uses rigorously tested software and security systems. You’ll never be asked to give access to your bank login details or password to anyone other than your own bank or building society.

It’s regulated – only apps and websites regulated by the FCA or European equivalent can enrol in the Open Banking Directory.

You’re in charge – you choose when, and for how long, you give access to your data.

Extra protection – your bank or building society will pay your money back if fraudulent payments are made. You’re also protected by data protection laws and the Financial Ombudsman Service.

Why should charities use open banking payments for donations?

Convenience – The fast nature of open banking payments means that donating is more convenient and easier to complete. This promotes donating as it is hassle-free. The knock-on effect from this is a greater likelihood of donations.

Covid-19 – With the recent requirements of social distancing, there has been a natural drop in the number of in-person donations. open banking’s ease-of-use makes this the best and most suitable alternative.

Zero Transaction Fees – Card payments are accompanied by processing fees. open banking payments are A2A (Account to Account) transfers, which removes these fees altogether. This means that the value of donations are higher, and you can maximise your fundraising because of this.

Security – The safety that open banking offers builds greater trust in charities from donors. Charities not handling any financial data (because of A2A) reassures donors that their money and information is safe. This greater trust and display of ethics will likely encourage donations.

What do commercial businesses gain?

  • Competition – Increased competition leads to greater innovation in financial products. If one retail company utilises open banking and another competitor does not, this creates opportunities to develop.
  • Products - With the sharing of information becoming encouraged, banking data through open banking Payments can be utilised to create new financial products. These include funding platforms, supplier payment, services, credit checks, and insurance. These can then be competitively priced to suit customer need.
  • Speed – Having access to an individual’s or company’s financial data should greatly reduce the time it takes for financial services to be set-up; for example, providers may be able to approve loans much more quickly. Retailers could also process payments much faster, meaning access to the product or service being paid for may be faster too.
  • Improvement - With information now more available than ever before, we might see other industries looking to utilise this data to improve their services and offerings for clients. For example, in recent years, the introductions of APIs changed the face of the travel sector.

How is the use of open banking payments adopted?

In 2016, The Competition and Markets Authority (CMA) found that older, larger banks don’t have to compete hard enough to gain customers’ business, while newer banks find it difficult to access the market and grow.

One of the CMA’s recommendations to tackle this problem was open banking. This means that open banking is more commonly used by newer banks to offer better competition to traditional, more established banks. Examples of these include Monzo and Starling Bank.


Buy now, pay later - “Buy now, pay later”, has become the new trend of the pandemic times. Its main priority is to ensure the highest purchase conversion rates possible, by providing customers with extra short term and interest free purchase options. The newest trend in online shopping is essentially a financing arrangement that allows customers to make purchases without the need to pay the product's full price all at once. Even though it may sound like traditional credits, with BNPL customers are offered options that split the price into a few instalments, often interest-free.

With the integration of open banking on BNPL, providers can further improve their approval rates and provide better assessment for their customers. Without the need to connect with traditional credit bureaus and the possibility to make quick analysis of current financial data, providers assure that every assessment takes into consideration the current financial situation and habits of the customer.

Insurance companies can offer tailored packages - the arrival of open banking means that players in this market can take advantage of new tools.

There are multiple insurance quote comparison platforms online, that constantly help customers to find the perfect match for their needs. Now, with the implementation of open banking in their platforms, they can provide a more accurate assessment to each person individually taking in consideration the cash flow on their bank accounts, current loans, etc.

Crypto can tackle the challenge of smooth connections between wallets and bank accounts - One of the challenges in the crypto exchange market is how platforms can assure customer safety, smooth and fast user experience when buying, selling and trading assets. Open banking can present itself as the solution, allowing for a frictionless customer experience when dealing with funds, as well as faster identity verification.

Photo by Jannis Lucas on Unsplash

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