Open banking payments
Cardflo integrates open banking payments, enabling direct bank-to-bank transfers for your customers. This method bypasses traditional card schemes, potentially reducing transaction costs and enhancing security.
Merchants benefit from real-time payment confirmation and reduced fraud risk, streamlining the payment process for both parties.
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The overview
Open banking payments, built upon the frameworks established by PSD2 and the subsequent development toward PSD3, facilitate account-to-account (A2A) transfers by utilising Application Programming Interfaces (APIs).
This mechanism allows a Payment Initiation Service Provider (PISP) to communicate directly with the bank of the payer, eliminating the requirement for card network involvement. Because these transactions bypass the traditional rails governed by schemes, they generally do not incur interchange or scheme fees.
The technical process involves a secure authorisation through the banking app of the customer, often employing biometrics for Strong Customer Authentication (SCA).
This method sits alongside traditional merchant accounts and gateways as a push-payment alternative, where the risk of certain fraud types like lost-of-stolen card abuse is significantly minimised.
For merchants, this structure provides a route to move funds directly into a settlement account without the delays typically associated with credit card clearing cycles.
How it works
Payment Initiation Request
The merchant gateway sends a request to a PISP at the point of checkout. This request contains the transaction amount, currency, and the specific merchant credentials required for the transfer.
The customer is then prompted to select their bank from a list of integrated financial institutions.
Customer Bank Authorisation
The user is securely redirected to their mobile banking application or online banking portal. This environment is controlled entirely by the issuing bank, ensuring that the merchant never handles sensitive login credentials.
The customer logs in using their standard banking security protocols, such as fingerprint or face recognition.
Payment Consent Approval
Once logged in, the customer reviews the payment details including the recipient name and total amount. By providing consent within their bank interface, they authorise the bank to execute a Credit Transfer.
This step satisfies SCA requirements under current regulatory mandates in the UK and European Economic Area.
Real Time Status Notification
The bank confirms the successful initiation of the transfer to the PISP, which then notifies the merchant gateway. While the actual movement of funds depends on the underlying clearing system, such as Faster Payments or SEPA Instant, the merchant receives a digital confirmation almost immediately.
Automated Reconciliation
The final stage involves the matching of the received funds with the original order ID.
Because open banking payments include specific metadata in the transfer reference, the manual effort usually associated with standard bank transfers is reduced, allowing for automated order fulfilment and updated ledger entries.
Why it matters
Reduction in Processing Overheads
By utilising A2A rails, businesses can avoid the multilayered cost structure of card payments, which includes interchange, scheme fees, and acquirer margins.
For high-ticket items, where percentage-based card fees become significant, the flat-fee or lower-percentage model of open banking provides a measurable reduction in the total cost of acceptance. This benefit is particularly acute for merchants operating on thin margins who require more efficient capital management.
Elimination of Chargeback Risk
Traditional card payments carry a persistent risk of chargebacks, which can be initiated months after a transaction. Open banking transfers are push-payments, meaning they are authorised through the banking security of the payer.
Since there is no equivalent to the card-scheme chargeback mechanism for these transfers, merchants are better protected against friendly fraud and certain types of payment disputes that lead to revenue loss.
Higher Authorisation Rates
Card payments may fail due to expired plastic, stolen cards, or aggressive fraud filters from issuers. Open banking bypasses these hurdles by verifying the availability of funds in real time before the payment is authorised by the customer.
This direct interaction with the bank account often leads to higher successful completion rates compared to card-not-present transactions where details may be entered incorrectly.
Use cases
High-Value E-commerce
Retailers selling luxury goods or electronics can avoid the high percentage fees associated with card payments while bypassing traditional transaction limits that often lead to card declines for expensive orders.
Subscription and Bill Pay
Service providers can utilise open banking for recurring payments, reducing churn caused by expired or cancelled credit cards by linking directly to a persistent bank account via Variable Recurring Payments.
Travel and Hospitality
Airlines and travel agencies manage large volumes and high values; direct bank transfers allow these firms to confirm bookings instantly without the risk of retroactive chargebacks frequently seen in the industry.
Wealth Management and Fintech
Investment platforms can allow users to fund their accounts instantly, ensuring capital is available for trading without the multi-day delays often found in traditional manual bank transfers or BACS.
By the numbers
This range reflects typical industry observations when comparing A2A fees to the total cost of card acceptance including interchange and scheme fees.
Industry benchmarks for successfully authenticated open banking payments often exceed card-not-present rates due to real-time fund checks and biometric security.
Typical time for a customer to complete an open banking payment via mobile app redirect, compared to manual entry of card details and 3DS prompts.
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What you get with Open banking payments
- Eliminate interchange and scheme fees by bypassing traditional card network infrastructures and processes.
- Reduce the operational burden of managing chargebacks as A2A payments are generally non-reversible.
- Ensure compliance with SCA through native biometric authentication within the banking application of the payer.
- Improve cash flow with rapid settlement via Faster Payments or SEPA Instant clearing systems.
- Automate bank transfer reconciliation using unique payment references passed through the PISP API.
- Decrease abandonment rates by removing the need for manual entry of long card numbers.
- Verify the presence of sufficient funds in real time before the transaction is authorised.
- Provide a secure payment alternative for customers who do not possess credit or debit cards.
- Lower the risk of data breaches by never storing or transmitting sensitive cardholder data.
- Optimise payment flows for mobile users through deep-linking directly into trusted banking applications.
A short scoping call, then a written plan for your MIDs.
Questions about Open banking payments
How do open banking payments differ from traditional bank transfers?
Traditional bank transfers often require the customer to manually log into their bank, add a new payee, and copy over a reference number, which is prone to human error. Open banking payments automate this through a PISP API.
The merchant initiates the request and the customer simply approves it within their banking app. This ensures the correct amount and reference are used, allowing for automated reconciliation and immediate confirmation, which manual transfers cannot provide.
Are open banking payments susceptible to chargebacks?
Unlike card payments governed by Visa or Mastercard rules, open banking payments do not have a built-in chargeback mechanism. These are credit transfers initiated by the payer.
While a customer can still raise a dispute with their bank if they suspect fraud, the 'friendly fraud' or 'item not received' chargeback process frequent in the card industry does not apply.
This provides merchants with greater payment finality and protects against the fees and administrative load of card disputes.
Do customers need to share their banking credentials with the merchant?
No, customers never share their banking login details, passwords, or PINs with the merchant or the payment provider. The authentication happens entirely within the bank’s own secure environment.
The payment provider acts merely as a bridge, securely passing the payment instruction to the bank. This model significantly reduces the PCI-DSS scope for merchants as they are not handling sensitive financial credentials or cardholder data.
What is the typical settlement timeframe for these transactions?
The settlement speed depends on the underlying clearing rails used in the specific region. In the UK, most open banking payments use the Faster Payments service, which typically settles funds within seconds or minutes.
In Europe, the timeline depends on whether the bank supports SEPA Instant. If SEPA Instant is not available, it may revert to standard SEPA Credit Transfer, which can take one business day.
How does open banking interact with Strong Customer Authentication (SCA)?
Open banking is designed to be natively compliant with SCA. When a payment is initiated, the customer must authenticate the transaction using at least two factors, such as their banking app (possession) and biometrics or a passcode (inherence/knowledge).
This satisfies PSD2 requirements more fluidly than 3-D Secure, as it uses the bank's own security features that the customer is already accustomed to using.
What happens if a customer has insufficient funds?
If a customer attempts an open banking payment and does not have enough money in their account, the bank will typically refuse the transaction during the authorisation stage.
This is a significant advantage over some card transactions that may be authorised but later fail during settlement, or result in costly overdraft fees for the consumer and potential declines for the merchant.
Can open banking be used for recurring payments or only one-off transactions?
Currently, open banking is widely used for single immediate payments. However, the industry is moving towards Variable Recurring Payments (VRP) and 'sweeping' which allow for ongoing authorisations.
While not yet as universal as card-on-file or Direct Debit, VRPs are becoming an alternative for subscription models, offering more control to the consumer and instant settlement to the merchant.
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