What are Open Banking Payments?

What Are Open Banking Payments?

Open banking payments allow customers to pay for goods and services directly from their bank account, using secure bank-to-bank transfers initiated through authorised third-party providers. Instead of entering card details, the customer selects their bank, authenticates using their banking app or online banking credentials, and authorises the payment. The money moves directly from the customer's account to the merchant's account, bypassing the card networks entirely.

Think of it as the difference between writing a cheque (where money moves between banks through the card system acting as an intermediary) and handing over cash directly (where money moves straight from buyer to seller). Open banking cuts out the middlemen -- Visa, Mastercard, and the various processors and acquirers in the card payment chain -- and with them, a significant portion of the transaction costs.

How Open Banking Payments Work

Open banking payments are built on a framework of secure APIs that allow licensed third-party providers to access bank account information and initiate payments with the account holder's explicit consent. In the UK, this framework was established by the Competition and Markets Authority in 2018 and is regulated by the Financial Conduct Authority.

The Payment Flow

When a customer chooses to pay using open banking, the process typically works like this:

• The customer selects the open banking payment option at checkout or during a phone payment
• They choose their bank from a list of supported banks
• They are redirected to their bank's authentication system -- usually their banking app -- where they review the payment details and authorise the transaction
• Once authorised, the bank transfers the funds directly to the merchant's account
• The merchant receives confirmation that the payment has been authorised and, in most cases, the funds settle within seconds or hours rather than the days typical of card payments

The entire process takes about the same time as making a card payment -- often less, since there is no need to type in a 16-digit card number, expiry date, and security code.

Payment Initiation Service Providers (PISPs)

The companies that facilitate open banking payments are known as Payment Initiation Service Providers, or PISPs. They are licensed and regulated by the Financial Conduct Authority in the UK and must meet strict security and data protection standards. The PISP acts as the bridge between the merchant and the customer's bank, handling the technical integration and ensuring the payment is processed securely.

Variable Recurring Payments

One of the most exciting developments in open banking is variable recurring payments (VRPs). Unlike traditional direct debits, which are inflexible and slow to set up, VRPs allow merchants to collect recurring payments of varying amounts with the customer's pre-authorised consent. The customer sets maximum limits, and payments within those limits are processed automatically. This has significant implications for subscription businesses, utilities, and any business that collects regular payments.

Why Open Banking Payments Matter for Businesses

Lower Transaction Costs

This is the headline benefit. Card payments typically cost merchants between 1 and 3 percent of the transaction value, plus fixed fees per transaction. Open banking payments are significantly cheaper because they bypass the card networks and their associated interchange fees, scheme fees, and processor margins. For high-volume businesses, the savings can be substantial.

Faster Settlement

Card payments typically take one to three business days to settle into the merchant's account. Open banking payments, built on the UK's Faster Payments infrastructure, can settle within seconds. This has a direct positive impact on cash flow, particularly for businesses that operate on tight margins or need to manage working capital carefully.

Reduced Fraud Risk

Open banking payments require the customer to authenticate directly with their bank, usually through their banking app with biometric verification. This makes them significantly harder to defraud than card-not-present transactions, where a criminal only needs the card number, expiry date, and security code. There are no chargebacks with open banking payments, which eliminates a significant cost and administrative burden for merchants.

No Card Expiry Problems

Because open banking payments are linked to the customer's bank account rather than a card with an expiry date, there is no risk of payment failures due to expired cards. For subscription businesses, this removes one of the biggest causes of involuntary churn.

Open Banking and Telephone Payments

Open banking is increasingly relevant to telephone payment scenarios, even though it was originally designed for online transactions.

Pay by Bank During a Phone Call

Some payment platforms now allow agents to initiate open banking payments during a phone call. The agent generates a payment request, and the customer receives a link via SMS or email that takes them to their banking app to authorise the payment. The customer never needs to share their card details over the phone, and the agent never handles any sensitive financial information. The payment settles quickly, and the agent receives confirmation while still on the call.

Complementing Card Payments

Open banking does not replace card payments over the phone -- it complements them. Some customers prefer to pay by card, and for those transactions, secure DTMF-based phone payment solutions remain essential. But offering open banking as an alternative gives customers more choice and can reduce costs for the business. For high-value transactions in particular, the lower fees of open banking can make a meaningful difference.

Reducing PCI Scope

Because open banking payments do not involve card data at all, they sit entirely outside PCI DSS scope. For businesses looking to minimise their PCI compliance burden, offering open banking as a payment option alongside secure card payments can reduce the volume of card transactions that need to be handled through PCI-compliant channels.

Practical Considerations

Customer Adoption

Open banking is still relatively new, and not all customers are familiar with it. Adoption is growing steadily -- millions of open banking payments are processed each month in the UK -- but businesses should expect that some customers will prefer to stick with cards. Offering both options is the pragmatic approach.

Bank Coverage

Not every bank supports open banking payments, though the major UK banks all do. Before rolling out open banking as a payment option, check that the banks your customers use are supported by your chosen PISP.

Refund Handling

Refunding open banking payments is less straightforward than refunding card payments. Because the money moves via bank transfer rather than through the card networks, refunds need to be processed as separate bank transfers. Some PISPs handle this automatically, but it is worth understanding the refund process before you go live.

Regulatory Environment

Open banking is a regulated activity. The providers you work with must be licensed by the Financial Conduct Authority, and the payment flows must comply with Strong Customer Authentication requirements. Make sure any open banking integration meets these regulatory standards.