Open banking refunds and reverse payments: what you need to know

A guide to what you can and can't do with open banking refunds.

What is a refund? When it comes to open banking, it’s not as straightforward as you might think. In this quick guide we’ll explain what you can do to refund payments through open banking, why we don’t think that’s good enough, and what we’ve done to enable instant refunds for TrueLayer customers.
For most online businesses, refunds are an important part of the payment experience. In new research conducted by YouGov and TrueLayer in 2021, we found that the majority of online shoppers expect a refund within one week, and more than a third expect it in less than a week. Two thirds also said that time taken to receive a refund is an important factor affecting whether or not they shop on that website again — and this rises to 88% for high value purchases. Shopper expectations on refunds often clash with the reality of payment methods like cards. Refunds on online card payments can take up to five days, and for digital wallets, often longer. Meanwhile, refunds using traditional bank transfers can take up to 3 days.

Can you do refunds with open banking?

So, what about open banking? We know open banking enables instant pay-ins, but can you refund a customer via open banking — and if so, is it instant?The short answer is yes you can in the UK, but it’s not instant. Let’s explain in more detail. Open banking rails were primarily designed as one-way rails for making payments to a merchant or a person. In the UK, however, open banking does now facilitate something called ‘reverse payments'. 

What are open banking ‘reverse payments’?

Under the Open Banking standard in the UK, some of the largest banks have been asked to support what’s known as ‘Proposition P9 - Reverse Payments’. This allows a third party provider like TrueLayer to pull the user’s payment details from the bank’s open banking API. This sounds great! But it comes with a number of issues. 
  1. The user has to give their explicit consent, which introduces friction in the user journey.
  2. The account details are provided by the bank, rather than directly from the faster payments message, which requires an additional API call. 
  3. Reverse payments are only supported by the CMA9, the 9 largest banks in the UK. This misses out around 20% of the market.
  4. It’s impossible to offer instant refunds using open banking reverse payments, as every requested reverse payment would have to be authorised by an individual within your business.
In order to offer instant refunds, you’d need to integrate a payouts solution alongside your open banking payments. That means you’d be building two integrations, instead of one. 

Refunds with PayDirect

We decided to build PayDirect because what is offered by native open banking APIs isn’t good enough. A refund should be just that – you send the money back to the account it came from, instantly and with no fuss.PayDirect makes open banking payments and refunds really simple: you can make an instant refund or payout from your TrueLayer wallet to any user’s bank account using the Faster Payments rails in the UK.We receive the user’s account details from the inbound payment for every single payment made via PayDirect, and we give you the ability to make a closed-loop payout to that account, guaranteeing that your payment goes straight back to the account it came from.Check out our documentation or set up some time with our Sales team to discuss  

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Matt joined TrueLayer in 2019 to help scale up our core network for data & payments, which now processes millions of transactions daily.

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