Change at the Checkout: The Rise of Open Banking Payments

There has been a shift in the way open banking payments are used in the UK, from peer to peer transfers and invoice payments, towards ecommerce payments to a merchant. Open banking has been around since 2018 in the UK, so why are ecommerce retailers now accepting open banking payments at checkout?

In this post, we’ll examine why the last twelve months have made open banking even more relevant to ecommerce retailers, the benefits it provides and how merchants can use it as a way to take payments and verify account ownership.

Post-pandemic payments: why open banking is relevant to retail

The pandemic has accelerated growth in ecommerce, as millions began to shop online out of necessity. With brick and mortar shops shut for months and consumers forced to shift shopping habits online, ecommerce sales saw the equivalent of five years of growth in just 12 months last year in the UK alone.

More choice in online shopping means retailers have to fight harder for loyalty and provide consumers with seamless shopping experiences. To meet demand, retailers must continue to optimise their online presence to attract and retain customers, with the checkout experience now becoming a core focus.

Yet as more people buy online, traditional payment methods, designed for the pre-internet economy, are increasingly unfit for purpose. Merchants are faced with more card-not-present fraud, mounting costs from transaction fees and chargebacks, poor payment conversion and slow refund mechanisms.

According to new research from TrueLayer and YouGov, half of merchants surveyed (49%) rated the high cost of payments as one of their top two pain points with existing payment providers, and almost a third (31%) said it was their #1 pain point.

High fraud and chargebacks, and low payment conversion are also causing merchants significant pain: 36% of merchants rated high fraud and chargebacks in their top two pain points, while 1 in 5 merchants (20%) said it was their #1 pain point.

For merchants with high average order values - those that often exceed £500 (eg. electronics, furniture and household goods) - annual chargeback costs can be a significant financial burden, on average £235k for each retailer. 

Regulation is adding to the pain, with Strong Customer Authentication (SCA) likely to impact the bottomline for retailers in the UK and Europe – some studies suggest it could reduce conversion on card payments by 20-30%.

How does open banking work?

Open banking enables businesses to securely connect to a consumer's bank account using open APIs, to initiate a payment or retrieve data on the customer’s behalf.

It’s cheaper, more secure and better converting than card payments.

To pay by open banking, the consumer selects the payment option at checkout. Here, they’re redirected to their online banking to securely confirm the payment. With mobile app to app flows, this is usually through fingerprint recognition or Face ID. 

Funds are pushed directly from the customer’s bank to the merchant account, with no third party network in the middle.

How does it benefit merchants?

Open banking enables merchants to provide a better online end to end payment experience for customers, while benefiting from:

• Higher conversion – up to 40% higher than other methods such as cards, typically with 95% payment success rates. That could mean a 40% increase in revenues.
• Lower fraud – every payment is authenticated by the user’s bank, which by default, adheres to SCA requirements and goes through the banks’ fraud detection engines. No user credentials or card details are ever shared with a third party in this process.
• No chargebacks – because open banking providers instruct bank transfers on behalf of the customer, there is no built-in chargeback mechanism.
• Payment confirmation in seconds – ship goods quickly and with confidence.
• Instant (UK) or quicker (EU) payment settlement – making it easier to manage cashflow.
• Reduced operational costs – no card or interchange fees and less time spent reconciling payments (no more mistyped references, payment details are automatically populated).

Building loyalty through refunds

This is just the beginning, there is an even bigger opportunity for ecommerce merchants around the refund process.

The majority of shoppers expect a refund from an online purchase in one week or less.  Those expectations are not always being met: according to the TrueLayer/YouGov research one third of merchants receive frequent complaints about slow or lost refunds, and this rises to more than half for merchants with high average order value (above £500).

Instant refunds present an opportunity for retailers to win customer loyalty: 2 in 3 shoppers (67%) said the time taken to receive a refund is an important factor affecting their decision of whether or not to shop on that website again. Merchants also agreed: 85% said that offering instant refunds would make customers more likely to shop with them again.

Although refunds aren’t included within open banking, firms such as TrueLayer have built this functionality and enabled instant refunds by building on top of open banking standards. With PayDirect, merchants can send TrueLayer their IBAN details and we handle the rest, enabling shoppers to be refunded in seconds, and allowing them to make new purchases sooner.

Change at the modern checkout

Our research suggests that shopping behaviour is influenced by the availability of payment options. Almost half of UK shoppers (48%) said availability of different payment options makes them more likely to buy from a retailer.

The opportunity and need to create the ultimate online shopping experience, where payments aren’t just retrofitted for the online world, is huge. But it clashes with the current reality. Debit and credit cards have been driving global retail commerce in the last decade but today they’re falling short.

New technology like open banking is rewriting the payments rulebook, presenting a unique opportunity for merchants to increase payment acceptance, enhance security and payment UX while keeping costs low.

Indeed, almost two thirds (63%) of shoppers said they would be comfortable paying by open banking. That is also reflected by the merchants, where 74% said that instant bank transfers, powered by open banking, are part of their long-term strategy.

At TrueLayer, we believe that this is the beginning of a payments revolution, which marries the convenience of a digital wallet with the security of your trusted bank.