Open banking is coming to retail: here’s why it matters

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Jiun Yi Tan, Account executive
6 May 2021
money moving sideways

Lloyds Banking Group reported this month that 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 retailers now accepting open banking payments at checkout? 

In this post, we’ll examine why 2020 made open banking more relevant to retailers, the benefits it provides and how merchants can use it as a way to take payments and verify account ownership.

Why 2020 made open banking more relevant to retail

The pandemic has accelerated growth in online commerce, as millions began to shop online out of necessity. Online retail sales saw the equivalent of five years of growth in just 12 months last year in the UK alone, and this growth is predicted to continue throughout 2021. JP Morgan predicts ecommerce sales in the UK and Europe will reach €940bn by 2023, with mobile transactions accounting for 51%.

But with this growth, retailers are increasingly feeling the pain of payments. 

More choice in online shopping brands means retailers have to fight harder for loyalty and provide consumers with seamless shopping experiences. Yet as more people buy online, retailers are faced with more card-not-present fraud, mounting costs from transaction fees and chargebacks, poor payment conversion and slow refund mechanisms.

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 can open banking help?

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.

At TrueLayer, our ecommerce customers use open banking for:

  1. Instant, high-converting payments – letting shoppers pay directly from their bank account using their fingerprint or face ID. 

  2. Keeping costs low for high average order value baskets – no card processing or complex interchange fees.

  3. Processing instant refunds to boost loyalty – once integrated with TrueLayer, merchants can send us their IBAN details and we handle the rest, enabling shoppers to be refunded in seconds, and allowing them to make new purchases sooner.

  4. Quicker seller onboarding to marketplace platforms – accelerating the KYB process and verifying account ownership so that trusted sellers can get up and running fast and receive payouts to the correct account.

How do open banking payments work?

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 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 compare to other payment methods?

Open banking enables retailers to provide a better online 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. Learn more about consumer protections with open banking.

  • 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 time reconciling payments (no more mistyped references, payment details are automatically populated).

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Consumer protections with open banking

Open banking payments are incredibly safe by design. In the unlikely event that something does go wrong when making a payment online, there are two types of protections that come into effect: consumer protections and buyer protections. For more information on how these protections apply to open banking, see our guide to consumer protections. 

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