Although the rate of Open Banking adoption has been impressive – seeing cumulative growth of 245% between 2021 to 2022, for example – many business owners are still unaware of this flexible, modern payment method. In this Q&A, head of payment product development and financial partnerships at Ecommpay, Olga Karablina, explains how Open Banking works, how it can improve the checkout experience and help with new market expansion.
1. For those unfamiliar with the technology, what are the benefits of Open Banking, and how does it differ from other payment methods?
Open Banking is a way of securely connecting customers to their banks during checkout, so that they can pay directly from their bank accounts. To end-consumers, an Open Banking transaction works just like a regular bank transfer, but for business owners, the technology has several distinct advantages. For example, rather than individually adding multiple banks to their payment pages, merchants can use a single integration that gives access to 85% of EU and UK banks, giving end-consumers the ability to pay with their preferred local option.
2. Let’s discuss the pros and cons of Open Banking. Firstly, how can online businesses benefit from it?
In many European countries, people prefer to pay by bank rather than by card. Therefore, to increase sales in specific EU countries, merchants should offer the opportunity to pay by bank at their checkout pages. It’s also worth noting that this payment method completely removes the risk of chargebacks, making it an interesting proposition for online merchants.
Open Banking payments are also cheaper for merchants than cards, as there are no Visa or Mastercard interchange fees to worry about. This is particularly beneficial for international sellers, many of whom are finding card fees pretty noticeable these days, especially after Brexit and the ongoing cost-of-living crisis.
Despite the fact that card fees have remained relatively stable over the past decade, there’s always a risk that payment networks will raise rates.
3. Are there any potential downsides to Open Banking that merchants should be aware of?
As a payment method, there’s practically zero downside. However, Open Banking is a relatively new concept, and as such, suffers from a general lack of awareness. Consumers and business owners alike have shown apathy and even distrust of the technology. However, the fintech sector is working hard to educate users and ease perceived fears about data sharing.
Out of the seven million UK consumers actively using Open Banking, 1.2 million are first-time users. That’s a hugely promising figure and shows the value that shoppers place on smooth, frictionless digital payments.
4. You mentioned that Open Banking doesn’t allow chargebacks. Could you elaborate on that?
Open Banking works in the same manner as a bank transfer, which means there is no built-in mechanism for initiating a chargeback. In addition, because Open Banking uses strong customer authentication, it’s almost 100% guaranteed that the person making the payment is a legitimate shopper who understands what they are paying for.
Finally, while we can’t guarantee that an Open Banking transaction isn’t fraudulent, the likelihood is extremely low compared to the risk of a payment being made using a stolen card, which is another big plus for businesses.
5. Can Open Banking influence checkout conversion levels?
Definitely. Banks have been around for many, many years. They’re trusted establishments that are known to keep your money and data safe. When a shopper sees their bank’s logo, they immediately trust that brand — probably more so than any other payment method.
In addition, Open Banking payments are facilitated through a customer’s banking app, so card numbers, CVV codes, and other manual data inputs are not required, which can also improve checkout conversion.
6. What types of businesses would benefit most from Open Banking?
I would say there are no specific limits for the usage of Open Banking, so long as a merchant chooses a reputable provider to set up their payment processes and they have all of the correct licensing and regulatory protocols in place.
7. Do different Open Banking solutions exist, and if so, how do they vary?
The fintech market generally offers two types of Open Banking payment solutions. The simplest and most common allows consumers to initiate account-to-account payments directly from their bank to a merchant’s account.
The second Open Banking solution is rarer, yet more beneficial for certain merchants. Consumers still make payments directly from their bank accounts, but all money is collected in a separate merchant account created by the payment provider on behalf of the merchant.
8. What are the advantages of the second option?
Payouts and refunds can be made directly from the merchant account, and all payments from end consumers are held in one place and not mixed with operational business transactions.
In addition, businesses will receive confirmation when payments arrive in their merchant account, and benefit from automatic reconciliation. Advanced Open Banking solutions also allow medium or larger companies to quickly and efficiently manage funds to and from multiple sources, disburse payments, and track transactions. On the other hand, simple account-to-account Open Banking is a better fit for small business owners.
9. How can merchants ensure they pick the right Open Banking solution and that the technology is implemented correctly?
Choosing the best Open Banking solution ultimately rests on picking the right payment provider. Merchants should only partner with a company offering high levels of transparency, expertise, and knowledge.
Open Banking is still developing, so a good understanding of the technical nuances is required, which merchants should be informed of before implementing a solution at their checkouts.
10. Are there any specific functionalities that merchants should look out for when choosing an Open Banking solution?
Bank transfers have been around for a very long time. It’s important to remember that Open Banking isn’t technically a payment method but a type of payment initiation service. For account-to-account Open Banking payments, a request is sent to the bank, which accepts the request and initiates the transfer. Meanwhile, the payment provider ensures that the funds are safe and received in a timely manner by the merchant.
On top of Open Banking account-to-account payments, we advise that merchants add a payment confirmation solution. Once a merchant receives a payment or deposit confirmation, they can safely issue their product or service, knowing that a transfer has been successfully initiated.
Fund aggregation is another useful function that can be added on top of basic account-to-account payments and makes issuing refunds and payouts quick and simple. Open Banking uses Faster Payments payment rails, which is much quicker for payouts and refunds compared to cards, which can take several days to process.
Finally, in the case of Ecommpay, we’re a financial institution, so we can provide additional functionality to safeguard our merchants’ funds. Our Open Banking Advanced solution also reduces operational costs and further improves convenience by adding automatic reconciliation on all incoming and outgoing transfers.
11. Are there any considerations for merchants when it comes to Open Banking’s geographical coverage?
The UK is currently an Open Banking leader and a pilot among European countries. However, efficient cross-border payments and broader Open Banking coverage are still important, especially if a business wishes to expand into new markets.
Many payment providers focus on well-established markets where all of the Open Banking APIs and regulations are already in place. However, although that provider may appear to have great coverage in terms of geographical area, it’s important for merchants to consider not just the number of banks in those regions, but the size of the banked population too.
12. Does Open Banking have any pitfalls as a payment method?
Ecommpay has been in the Open Banking space for a number of years now, and although we’re huge advocates of Open Banking technology, we have identified pitfalls along the way.
Suppose a business offers account-to-account payments and has a SEPA account in Spain but also sells cross-border to Germany. Despite the fact that SEPA transfers should work perfectly across the entire eurozone, some banks may add additional charges for a German-to-Spanish cross-border transaction. Delays can also happen, and these issues are known as ‘IBAN discrimination’.
Our goal is to identify these problems before they arise and ensure that all transactions are treated as local payments, which in turn, means that our merchants don’t have to pass unwanted extra costs on to their customers.
13. How do you see Open Banking evolving over the next five years?
That’s a question everybody asks, and unfortunately, there’s no 100% correct answer. Open Banking has been around for about five years. However, from an adoption perspective, the technology is still relatively new and mainly used to access account information — by lending companies, for example. I would say that Open Banking will continue to develop over the coming years, reaching a point where the completed payment system has the same essential functionality as a debit card.
If you imagine the process of taking a taxi, you just connect your card to the taxi application, take a ride, walk away when the ride is done and the payment is completed. Open Banking has yet to reach that level of functionality, but I’m sure we’ll see huge progress over the next few years.
From an industry perspective, Open Banking providers could increase adoption by focusing on providing a quality connection to thousands of banks, while also creating frictionless payment experiences for both merchants and end users.
Olga Karablina is head of payment product development and financial partnerships at Ecommpay
Listen to Olga Karablina on the Open Banking Expo Unplugged podcast, discussing what businesses need to prioritise in considering an Open Banking payments provider.