Breadcrumb

Traditional vs. Open Banking Payments

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedJan 20232 min read

Open banking payments are already standard in the EU and the UK. As this technology becomes more prevalent in North America, you might be wondering how it measures up to traditional payment methods like cards and bank transfers. So, what is open banking, and will it replace card payments? Here’s a comparison between open banking payments and more familiar methods.

What is open banking?

Open banking refers to a regulatory framework that varies slightly by country. The goal of any open banking system is to make it easy for consumers to share their financial data with third-party providers (TPPs) and banks. It uses application programmable interfaces, or APIs, to make this technology work. By sharing financial data between financial institutions, the idea is that consumers will have access to more efficient, convenient, and cost-effective products. They’ll be able to make faster payments at lower cost, with the freedom to shop around between banks. Open banking also opens the doors to new fintech businesses who can tailor their products to a wider range of customers.

How does open banking work?

Although the specific process might depend on the tool or app you’re using, here’s how open banking works when it comes to making a payment.

To get started, the customer selects their bank and starts the payment process. The merchant then requests payment using an open banking provider or TPP. This provider initiates the payment with the customer’s bank. The customer can log in to authenticate the payment, with instant verification from the bank. Funds move electronically from the customer’s bank account to the merchant’s accounts, and the transaction is complete. The process is fast and easy, initiated by the consumer who has full control over their funds.

Open banking vs card payments

By contrast, card payments require the use of a third-party payment gateway as well as the card network. Open banking payments tend to be faster and more secure than card payments because there’s no need to enter in any payment details. The technology itself is also highly secure. You can verify the transaction using a biometric ID instead for greater security. Businesses benefit from lower fees in comparison to the cost of credit card processing, and settlement is faster with instant confirmation.

Due to the convenience for both customer and business, open banking payments lead to higher conversion rates than credit cards.

Open banking vs direct debit

Another popular payment option is direct debit or ACH payments. These use the Automated Clearing House network connecting US banks and financial institutions. There are some similarities between open banking and direct debit, as both require authorization by the customer. The big difference is that with ACH payments, the provider controls payment rather than the bank account holder.

A benefit of ACH or direct debit payments is that businesses can use them to collect recurring, automated payments. The business pulls payment directly from the customer’s bank account which helps cut down on late payment. For one-off payments, however, open banking is often more convenient with an automated user experience and biometric security.

Is open banking safe?

Open banking uses the same security features that you’d see with traditional payment methods like cards and manual bank transfers. Yet it also adds that extra layer of security with built-in biometric data because transactions are approved on the user’s digital device.

Open banking is not only secure, but it in fact can be used to increase the security of your entire payments process. Nearly half of US businesses state that fraud is a top concern, particularly when it comes to onboarding new customers. Our Verified Mandates solution uses open banking to take new customers directly to their online banking login at the checkout stage. This provides quick, secure identity verification to cut down on fraud.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.