Open banking vs card networks: the future of payments

In the digital payments landscape, open banking and card payments often get compared. While open banking won't replace everything about card payments, it can certainly improve its inefficiencies. We explore how in this article.

For over a decade, experts have predicted the demise of physical money. While it’s true that debit cards have gained popularity in recent years, cash still remains a close second in the UK. In the same way that cash won’t vanish completely, open banking won’t eliminate cards.

But that’s not to say open banking won’t challenge card networks. Because let’s be honest, the card system goes back to the 1950s… and times have changed (a lot) since then. Payments have gone digital, and mobile wallets are replacing physical wallets in people’s pockets. In fact, one in five doesn’t expect to carry a wallet or purse in five years’ time.

Unlike ‘shiny new’ technology that creates a buzz before fizzling out, open banking solves a real problem that’s changing how money flows between consumers, businesses, and across borders. So what does this mean for card networks?

Open banking vs card networks: a comparison

There’s no denying that accepting card payments offers a high degree of convenience both in-store and online. But there are disadvantages such as high fees, lower success rates, fraud risks, and (a major one for consumers) slow refunds.

Open banking payments challenge all of these, and here’s how…

Open banking payments Card payments
Cost Open banking charges a fixed cost per transaction. Card networks charge a percentage of the transaction amount. That’s on top of interchange, scheme, gateway, and processing fees.
Speed While it depends on the scheme (more here), open banking payments that use Faster Payments support instant processing and settlement. Card payments involve lengthy communication between the merchant’s gateway, payment network, customer’s bank, and merchant’s bank, which slows processing and settlement.
Security Open banking payments are compliant with Strong Customer Authentication (SCA) requirements. Card networks are generally compliant with Strong Customer Authentication (SCA) requirements, except for transactions that fall under MOTO (Mail Order Telephone Order) and Merchant Initiated Transactions.
Conversion Approximately 98% (based on Yapily data) Approximately 85%
Convenience Digitally optimised and seamlessly integrated into the checkout process Websites sometimes retain card details, but not always.

For businesses, the two main concerns here are speed and costs. Whenever a card purchase is made, a time-consuming and costly process is set in motion.

Let’s break that process down.

The card process

  1. The merchant’s gateway scans the customer’s card to identify the payment network.
  2. It then contacts the network to confirm the customer’s authorisation.
  3. The network communicates with the customer’s bank to verify that they have sufficient funds, and if they do, the bank approves the transaction.
  4. Their bank then notifies the network, which sends the authorisation to the merchant’s bank for final approval.
  5. Once approved, the transaction is completed and confirmed on the gateway
  6. But the process doesn’t end there. The merchant’s bank has to initiate the settlement process by communicating its daily transactions to the network.
  7. The network then requests payment from the customer’s bank which generally takes around 2 business days to process (hence the confusing dates on our statements).

It gets bleaker when you consider businesses have to pay a fee for each transaction to the customer’s bank, the card network, and their own bank. But now that we know how inefficient card payments can be, let’s take a look at the open banking process.

The open banking process

  1. The customer selects ‘Pay by bank’ at the checkout.
  2. Then, they select which bank they would like to use.
  3. The customer is redirected to their banking app and proceeds to approve the payment.
  4. The merchant is promptly notified that the payment has been made.

Bonus: when merchants combine open banking data with a solution like Virtual Accounts, they’ll get confirmation of funds and immediate access to their money.

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How can open banking improve payment experiences?

Faster transaction speeds… Open banking payments offer faster processing than card payments because they’re executed directly from a customer’s bank account. This direct approach enables real-time processing and fast settlement, leading to better cash flow.

Lower transaction costs… Open banking payments are cheaper because they involve fewer intermediaries, resulting in lower transaction fees. This is particularly beneficial for merchants with high transaction volumes, as they can save significantly on processing costs.

Increased security… Pay by Bank transactions are highly secure because they’re subject to the highest level of security measures (think PIN, password, or biometrics). This means Payment Service Providers (PSPs) and merchants can offer consumers a secure payment option that protects sensitive financial information. Learn more about its security here.

Improved convenience… Payments made through open banking require zero manual input, making the overall payment experience more seamless and convenient for consumers.

Easy integration… Open banking payments can be integrated with existing payment systems, so more merchants can accept Pay by Bank transactions through their PSPs.

Case study: Making payments card-free with Yotta Pay

With fees as low as 0.19%, open banking is cementing Yotta Pay’s status as an ethically-driven payments provider. Until now, the idea that low-cost and sustainable could co-exist seemed paradoxical. But with open banking, Yotta Pay can achieve its mission to create a sustainable consumer payments infrastructure without plastic or paper.

Consumers benefit from an easy system which allows them to make purchases in a few clicks, with no need to download an app or remember card details and account passwords. And with UK card payments totalling almost £20bn, merchants save thousands of pounds each year compared to other payment rails. You can find out more here.

“Aside from the unnecessary fees associated with card terminals and transactions, there is an environmental impact, too. 30 million kg of PVC is used worldwide to create debit and credit cards which, at some point, will end up in landfills. Yotta Pay is using open banking to create an opportunity to save the planet, as well as money.” - Alexey Shmatko, CEO & Founder at Yotta Pay

What’s next for open banking payments?

Looking ahead, Pay by Bank will accelerate open banking adoption in general. It’s encouraging to see established organisations such as the government and household utility providers already on board.

Merchants will be able to accept micropayments, which are currently expensive for SMEs to process with card networks. Because of this, open banking is opening up new revenue streams for businesses that weren’t possible before.

And for banks, recurring payments represent the first opportunity to monetise open banking. With these exciting developments, it’s clear that open banking is set to change the way we pay with a more seamless and secure experience. Watch this space.

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Why now is the time to consider open banking

As we navigate a challenging economy, it’s well worth exploring how open banking can help businesses save money, improve user experience, and expand to new markets.

Build personalised financial experiences for your customers with Yapily. One platform. Limitless possibilities.

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