Why Open Banking?

There is a common misunderstanding of the word ‘open’ in the concept of open banking. Open banking doesn’t mean that banks openly share customer data with whoever wants to access it. In fact, third-party providers must undergo through rigorous regulatory licensing with national regulators if they want to implement open banking. For example, in European PSD2, providers must obtain either AISP or PISP licence to access customer information.

Open banking is enabled by secure APIs shared by banks with licensed third-party providers. When a customer chooses an open banking payment they are automatically transferred to their trusted banking interface, where the payment is authorised. This API app-to-app redirection prevents cybercriminals from potentially stealing their data, especially when compared with practices such as screen scrapping. Plus, under PSD2, Strong Customer Authentication (SCA) is a legal requirement for open banking payments. SCA is a multi-factor authentication measure aimed at preventing impersonation fraud. 

Some customers may wrongly assume that when they consent to data sharing, the whole world will be able to see what’s happening in their finances. This is simply not true. Only authorised third-party providers can access customer data. To get such a license, providers must obtain it via a national regulator such as FCA in the UK, BaFin in Germany, ACPR in France, and other relevant authorities of the country in question to make sure that providers comply with the rules and handle data correctly. Plus, customers can withdraw their consent anytime. 

There is a misconception that open banking payments only work for accounts at major banks. In reality, the open banking ecosystem is large and includes many smaller financial institutions too. According to Open Banking Tracker, there are 4,394 connected banks across 73 countries. At Noda, we connect to 1600+ banks across the UK and EU.

Some merchants may assume that the ‘pay-by-bank’ option may put off consumers who prefer paying by card. In fact, OB payments are much simpler and more secure, as customers do not need to enter their card details manually. The money is transferred from the same bank account that’s linked to a card, yet the transfer bypasses the card network, leading to faster processing and lower commissions. That’s why customers increasingly embrace open banking over cards. In the UK, for example, 11% of consumers are active users of this payment method. 

Conversions are the key metrics for payments. Therefore, it’s important to get them right. There is a myth that card payments lead to more successful transactions than open banking payments. In truth, the UX for open banking is much simpler. The users are redirected to their bank’s interface, and money is transferred directly from their bank account. This prevents the risk of mistyped card details and saves customers time and effort, leading to higher conversions.

Again, this is a misconception. As mentioned above, open banking payments don’t require manual information entry. Customers are redirected to their banking interface, where payments are authorised. The authentication may involve a passcode entry, a biometric verification, like a fingerprint scan or a face ID, and a code sent to their device. This journey is much easier and less time-consuming than entering lengthy card details.

Some merchants may think that even if a client finds their bank in the list, the integration will be full of friction, and the transaction will ultimately fail. We can assure you that open banking API integration is seamless as these APIs are standardised across PSD2 countries and banks. See how it works for yourself with Noda’s demo of an open banking transaction.

Some merchants may think that open banking payment processing is slower. In reality, payments made through cards involve intermediaries that incur longer processing time. Open banking payments happen from account to account, so no card networks are involved. Hence the payments are much quicker.

As mentioned earlier, customers increasingly prefer open banking over other payment methods. Statista estimated that by end-2024, the number of open banking users worldwide will reach 132 million. The rapid adoption of open banking is a clear sign of consumer trust. OB payments offer better, more intuitive UX, and consumers value the superior payment flow.