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Comparing Open Banking with Card Payments

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Ever since the concept of Open Banking first emerged, it has been seen as a way to improve competition & transparency in financial services. Giving consumers control over their data & making it easier for them to share, helps to level the playing field between the big incumbents & nimble new entrants.

But how does Open Banking payments compare to cards?

When making an online purchase, the advantages lie with Open Banking. Open Banking payments are quicker, easier & more secure. There’s no need to manually key in your card details or more importantly trust a website to store them for you. The checkout process is as simple as selecting your bank from the list provided & approve the purchase with biometrics (face ID or fingerprint) which virtually eliminates fraud, as the merchant can’t store your payment details (or steal with your biometrics).

This alone may be enough to give you a feel for the technology’s potential, but to truly understand, it helps to look at what it’s potentially replacing.

Every time you buy something with your card, a convoluted process begins:

1) The merchant’s gateway scans your card to determine the payment network. It then contacts the network to confirm you are authorised to transact

2) The network then contacts your bank, which checks you have sufficient money &, if so, approves the transaction

3) Your bank communicates this to the network, which passes it on to the merchant’s bank (the ‘acquirer’) to authorise the transaction. The transaction is then ‘approved’

It can be expensive for merchants, who pay a small fee for each transaction to the customer’s banks (known as interchange) the network & their bank - These fees can be considered a security fee, protecting the merchant from fraudulent payments & allowing the customer to receive refunds. However, the card system (‘rails’) harks back to the 1950s & brings layers of complexity & cost.

Open Banking payments allow the customer to authorise the transaction directly from their mobile banking app, pushing the money directly to the merchant’s account. The technology is newer, with fewer vulnerabilities, meaning there is no need for card networks to offer security or to charge the high fees that come with it.

Open banking makes payments faster and smarter

• Cheaper; by simply cutting out the middle man & removing the costly fees associated with card payments from Visa & Master Interchange fees, scheme fees & card processing fees as a whole, Open Banking payments has a clear advantage when it comes to creating a more cost effective payment method
• Faster payments; cash is king, with Open Banking payments funds are settled instantly, meaning you (the merchant) can ship faster & offer a better customer experience, in comparison with cards where the average settlement delay is 4 days
• Seamless checkout; Convert up to 40% better than cards, because Open Banking is designed for digital (specifically mobile) the process is less manual with the payment success rates being much higher.
  

Card payments:

• Cost to merchant - High
• Settlement speed - Circa 4 days
• User experience - Good when websites store information (or utilising E-wallets such as ApplePay) otherwise manual data entry required
• Payment conversion - Medium (Success rates c.85%)
• Security - Weak - Credential sharing is used but strong customer authentication will make payments more secure (but also adds a further layer of friction by manually logging into your banking app to confirm the payment OR 3DS2.0 confirmation

Open Banking

• Cost to merchant - Low
• Settlement speed - Instant
• User experience - Seamless; automated, mobile first, made for digital
• Payment conversion - High (Success rates >95%)
• Security - Strong -Biometric authentication and no credential sharing
  

Open Banking isn’t there yet, but it’s growing quickly

With the benefits of Open Banking being so advantageous, why hasn’t Open Banking completely skyrocketed & taken over card payments? Like anything new, it takes time, nobody expected the banking industry to transform overnight - Even as the UK & Norway lead the pack in terms of Open Banking adoption, there is still a long way to go.

The UK’s Open Banking Implementation Entity (OBIE) in November 2021 estimated 8% of digitally enabled consumers regularly use at least one Open Banking-enabled service, up from 5.5% in December 2020, to date there’s more than 6 million active users already, with a (CAGR) compounded annual growth rate of 24% & plenty of use cases across a variety of different sectors/service.

That’s an impressive growth rate & if history has anything to show; it’s that innovation is always part of the solution & in the next five years, Open Banking is predicting to potentially be the default way to pay online!