What is the difference between open banking payment initiation service and payment rails provider?

Moving your money from point A to point B using open banking requires two crucial services that facilitate this. Discover the difference between an open banking payment initiation service and a payment rails provider across the UK and EU.

Open banking is gaining greater adoption across the world, with over 60 countries having their discussions of open banking frameworks, as it brings benefits to both consumers and merchants. The driving force of open banking originated in the UK and Europe with the PSD2 legislation, before rippling across to further parts of the world. With open banking, there are two elements needed for successful cash flows, an open banking payment initiation service and a payment rails provider. With the proper payment initiation service provider and sophisticated payment rails, open banking will have the proper foundations to flourish.

We’re here to provide the answers so we’re all better informed when it comes to open banking payments.

What is a payment initiation service?

Open banking allows for payment initiation services, a simple way for customers to pay directly from their bank account without needing to manually input their card details or share them with the merchant. They are redirected to their online banking app where they can verify the payment using biometrics like Face ID or their fingerprint.

This type of service is enabled through a secure API using an authorised third-party provider called payment initiation service providers, or PISPs (like Yapily!). While a PISP cannot complete the transaction without the consent of the consumer, it acts as a link between them and the merchant to ensure a direct bank transaction with fewer intermediaries. This keeps both parties safer as well as adding a greater level of speed and convenience.

How does the payment initiation service work?

A payment initiation service provider (PISP) utilises banking payment rails to send the instructions of the payment to a bank in real-time.

When a customer is at the checkout ready to buy their selected goods or service, these are the steps they take for the payment initiation service to work:

  • they will see Pay by Bank as one of the payment options available.
  • Simply select their chosen bank from the list of various common banks.
  • Follow the redirect to their bank’s online or mobile app to verify their login details and confirm the payment.
  • Once the payment is approved, they’ll be automatically sent back to the merchant’s page with confirmation their order has been successful.

A payment initiation service helps to offer an alternative to traditional payment methods that can also come with high costs, long delays, or risk of manual error and fraud. This frictionless method provides a quick and convenient way to pay, while maintaining high security and lower cost for the merchant.

What are payment rails?

Some consider open banking to be a brand new payment method that uses its own route to service the payment. In fact, they use existing payment rails. Payment rails are simply the existing infrastructures that connect all banks and financial institutions to allow for transfers from the payer to the payee. Just like a train on a railway track, they get the funds from point A to point B and ensure that the payment instructions are sent to the financial institution.

What are the different payment rails?

The various types of payment rails include SWIFT, SEPA, CHAPS, Faster Payments, and debit and credit card networks.

SWIFT, or Society for Worldwide Interbank Financial Telecommunication, is one of the biggest global payment rails for sending money between banks around the world. Specific SWIFT codes assigned to banks and financial institutions enable these payments to be conducted. On average, the payment can take 1-4 business days to settle as it passes through several intermediaries, which can often cause friction and higher costs for businesses.

Debit and credit card networks are another popular payment rail and include Mastercard, Visa, and American Express. In order for these payments to be processed, merchants must pay a fee determined by the card network, and the settlement time varies in length as it’s not a real-time payment. While Visa and Mastercard tend to charge merchants fees between 1.5 -2.5% to accept their credit cards, American Express charges 2.5 - 3.5%, hence some merchants choose not to accept these cards.

Discover more about paying with open banking versus card networks.

What are the most popular payment rails in the UK?

  • CHAPS, or Clearing House Automated Payment System, is a popular payment system in the UK with often quick settlement times, although the payment instructions must be sent within a certain time on the same working day in order for it to be processed quickly. CHAPS is favoured for its fast settlement times (as long as you meet the cut-off time) and has no limit on the amount that can be transferred, yet also comes with a cost for the end-user.
  • Faster Payments is the electronic transfer of funds between banks and has one of the shortest settlement times. Once the instructions are sent, the sender verifies their identity, the receiving bank validates the funds are existent in a verified account, and then the transaction can be completed. Faster Payments, while near-instant and fee-free, is only available within the UK.
  • BACS (Bankers Automated Clearing Services) are standard transfers in the UK through Debit or Credit Cards which take up to 3 business days to settle. Depending on the bank, there are varying limits on how much can be transferred.

What are the local payment rails in the EU?

  • SEPA, or Single Euro Payments Area, is the payment rail for transfers in Euros between banks and these rails are only for transfers within SEPA zone countries. As of 2020, there were 36 members in SEPA with 27 being part of the EU. SEPA is only for euro transfers and with most payment rails, they include a transaction fee.

Next steps into open banking

Now that we’ve delved into payment initiation services and the various types of payment rail providers, it’s time to get your business started. Open banking is providing a better payment experience for industries from e-commerce merchants to lending to wealth management, as well as cutting down costs and keeping customers safe.

Ready to hear how we can help your business? Speak to one of our open banking experts today who are on hand to guide you through adoption and integration into your business’ existing operations.


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