Open Banking explained

As our world becomes increasingly digital, consumers are demanding slicker, quicker, more personalized experiences that fit conveniently into their lifestyles.

Open Banking is one of the key initiatives helping to address both consumer and merchant needs when it comes to payments.

What is Open Banking?

In a nutshell, Open Banking is a secure way for consumers to give merchants or service providers access to their financial information or to authorize a payment directly from their bank account, usually via a third party. Today and in the near future, Open Banking has the potential to revolutionize the way we move and manage money.

The digitalization of banking and payments

As technology has progressed and a new generation of digital natives have come into their buying power, digital adoption has soared; revolutionizing the way we shop, bank and pay.

The shift to digital channels has seen e-commerce and m-commerce use skyrocket – and online banking too. In 2020, mature markets like the UK and North America recorded between 75-80% of banking customers are now transacting online.

Research from PYMNTS.com shows that 46% of consumers became ‘digital shifters’ following the onset of the pandemic in spring of 2020, using online or mobile banking more than they did before the pandemic.1

As a result, the global online banking market is expected to hit $20.5 billion by 2026, up from $9.1 billion in 2019.2

Open Banking and PSD2

Open Banking is often talked about in conjunction with PSD2 (the Second Payment Services Directive). This piece of EU payments legislation came into full effect in September 2019 and is aimed at improving digital payments capabilities and enabling consumers in the EU to have greater control over their financial data. 

PSD2 has provided a European-wide regulatory framework that allows third parties safe and secure access to accounts to either gather transaction data or initiate payments on the customer’s behalf (with their permission). This has given a significant boost to Open Banking capabilities in Europe.

Open Banking online payments: the story so far

Sharing financial data across providers means that consumers can potentially use an app to have a single view of all their finances – and one place to manage it all, even if they have different accounts across different banks. 

This also gives the opportunity for providers to overlay innovative services such as finance management or budgeting tools that create real value for consumers and strengthen their customer relationships. 

While lots of these potential overlay services and innovations are still in the pipeline from fintechs and other service providers, the most immediate advantage of Open Banking is the ability for consumers to use online banking transfers to pay merchants. 

PSD2 has acted as a catalyst for this by requiring that all banks allow and support authorized third parties (called PISPs) to initiate payments. This will make bank transfers a much more widely available payment method across Europe.

This payment option is not just for e-commerce payments, but is also being taken up by a range of merchants and financial services providers for accepting payments and making business-to-consumer payments (although the latter are only supported by a limited number of providers). It has the potential to make commerce truly simple for both consumers and businesses.

This will only happen if Open Banking payments are delivered by full-service PISPs, like Trustly, who can connect via multiple channels and power the real-time movement of money.

Why are consumers flocking to Open Banking payments?

Essentially, Open Banking payments appeal to consumers because the ability to pay from their bank account addresses their top concerns and needs around payments:

  1. Simplicity: Consumers only have to authenticate themselves once to give permission to an Open Banking payment initiation service, then they can easily pay directly from their bank account every time, without having to enter card details or enter further credentials.
  2. Speed: When they utilize instant payments capabilities, Open Banking payments allow funds to be transferred immediately. This is particularly helpful for consumers who are looking for fast or instant fulfilment options, such as downloading digital entertainment, purchasing a travel ticket and many other uses. 
  3. Trust: Whether they’re buying their groceries or repaying a loan, customers feel more secure when they can select a familiar, trusted route to make a payment. There’s nothing more familiar for most than using their own bank account and their usual bank login.

What shoppers really want

To understand the uptake of Open Banking payments, it’s helpful to understand the broader context of consumer preferences. This reveals the importance that shoppers place on speed, convenience and security.

Source: "Creating more value at the checkout" 2021 Trustly Report

0%of shoppers prefer debit options when paying online
0%of Millennials and Gen Z consumers prefer debit
0%of consumers won’t buy if the checkout is too complex

A Mastercard study from June 2020 has found that the coronavirus pandemic has also accelerated the drive towards Open Banking as consumers look to take more control over their financial health and financial services providers explore how they can better support small- to medium-sized business customers.

Open Banking Merchant Benefits

It’s not just consumers who are attracted to the benefits of Open Banking payments – there’s a lot to be gained for merchants too. Full service Open Banking payments solutions can offer:

  1. Reduced costs: By supporting online banking payments, merchants can reduce payment processing costs by cutting out some of the fees from card schemes and instead enjoy a more flexible fee structure.
  2. Higher conversions and improved loyalty: Offering the right payment methods and a slick, trusted customer experience can certainly give merchants a competitive edge. As online bank transfers gain popularity and become a strongly preferred payment method, merchants may be able to increase conversion and payments acceptance rates by enabling this option at the checkout.
  3. Better payments visibility: Online bank payments that use instant payments capabilities can also help merchants improve cash flow, by moving money in near-real time and settling funds faster.
  4. Reduced fraud: Open Banking payments use a consumer’s bank login to authenticate the user, which means highly secure, multi-factor authentication is standard. This can help protect merchants against fraud and chargebacks. 
  5. Easy cross-border growth: A vital part of cross-border success for merchants is the ability to support payments in the customer’s currency and payment method of choice. Open Banking payments can offer easy currency conversion within the payments process. Open Banking payments  also offer a standardized way to accept payments across borders, without having to enable multiple payment methods in each country. However, this particular benefit is only available through a full-service PISP.
  6. Faster fulfilment with greater confidence: One advantage of Open Banking payments is that they should be able to use the instant payments rails. If the money can be instantly moved, or at least validated via the PISP, merchants can fulfil orders faster and with more confidence – supporting a better overall buying experience. Currently, this immediate transfer of funds is not supported by many PISPs.
  7. Immediate refunds: Full service PISPs can support instant refunds - a feature that is proven to increase customer loyalty. In fact, in our recent e-commerce survey, 65% of customers said the speed and ease of refund affects where they choose to shop, while 95% said same-day refunds would make them more loyal to a merchant. 

Of course, immediate refunds are also beneficial to merchants, since it helps them manage cash flow, reduce costs and minimize administrative complexity.  Plus, both merchant and consumer can feel more confident that there’s no ‘dead time’ where the funds are in transit for hours, or even days between the merchant’s account and the customer’s.


Open Banking in practice

Open Banking payments are beginning to gain momentum and the speed of adoption is accelerating. The advantages for all kinds of businesses are significant – here are a few use cases to illustrate:

  • Retailers: Shoppers can pay instantly and securely with no spending limits for high-value transactions and virtually no chargebacks for merchants. No manual input eliminates human error, reducing admin costs and improving your cash flow.  
    Instant refunds (via a full-service provider) can offer additional benefits for both consumers and merchants. For instance, customers don’t have the hassle of having to call support lines to chase up their delayed refund – and merchants can reduce their customer support overheads as a result.
  • Digital goods merchants: Open Banking payments via a full-service PISP can support an easier way to offer different payment options, including one-click payments and recurring payments. In the instant fulfilment world of digital goods, seamless payments, fast deposits and instant funds access are all valuable for both merchants and consumers.

Bill payments

PISPs who offer automated processes can help merchants simplify the payments experience for customers who prefer to pay by invoice. 

Paying an invoice by manual bank transfer can be a painful, error-prone process – introducing automated, digital enhancements through an online banking payments provider can significantly enhance the pay-by-invoice solution process and improve customer relationships.

  • Travel merchants: The travel sector has to contend with last-minute bookings, high fraud rates and complex supply chains, not to mention the ability to accept payments from any country and currency. 
    Open Banking payments allow travel companies to accept payments, issue refunds and access valuable user insight data. Easy activation and multi-currency functionality simplify the payments mix, currency offering and cost. 
  • Telcos: Open Banking payments can also support seamless mobile phone account top-ups which are quick and easy to perform from a digital device or in-store.
  • Financial Services: By offering instant bank transfer payments, financial services companies can differentiate themselves from competitors to attract new customers who are looking for more than just a good rate. 
    Plus, PIS online bank payments offer automation within the payment process, so customers don’t have to manually enter reference codes or IBAN numbers – something that is a significant pain point with traditional manual bank transfers. 
    Offering fast credit (or ‘payouts’) through a full service PISP can also boost customer satisfaction and review scores on comparison and affiliate sites, positively influencing prospective customers to drive growth. 

Refunds really matter

Consumers expect their refunds to be as fast and smooth as their original payment – and merchants can gain real revenue benefits from offering instant refunds.

Download the 2021 Trustly Report "Creating more value at the checkout".

0%of consumers won’t spend again until they receive their refund
0%of all customer support calls are related to refunds
0%of shoppers would spend more if offered a faster refund

A growing global phenomenon: Open Banking around the world

In some countries, like the UK, Open Banking has been around for a while, but it’s seeing increasing adoption around the world, especially among countries with strong digital and mobile payments uptake. Juniper Research forecasts that there will be over 130 million users of Open Banking globally in 2024, (up from 27 million in 2020) generating over $9.1 billion in payments (up from $130 million in 2019).

In Europe, banks and many businesses are familiar with Open Banking because it is supported by PSD2. This legislation has acted as a strong catalyst for Open Banking across Europe and use cases are on the rise as financial institutions, merchants and technology companies see opportunity to offer innovative services that create value for customers. This is clearly marked in the adoption figures and forecasts, with an estimated 61.3 million predicted users in Europe by 2024.

The Open Banking journey in Europe is overseen by regulators, but this isn’t the case for every country looking to implement similar initiatives. While some are being supported by regulatory frameworks or common standards, others are more market-driven as players across the ecosystem come to understand the benefits that Open Banking can deliver. 


Open Banking is a Global Trend

There are positive trends towards Open Banking in all geographies, but the drivers and catalysts are different in each market. For instance:

  • US: Major banks are building Open Banking APIs to launch new services and gain competitive advantage.
  • Australia and Canada: a mix of market-led and regulatory-driven change, including some steps towards Open Banking- related legislation.
  • Europe: PSD2 has been the main catalyst for Open Banking in Europe, making this market much more regulatory-led.
  • UK: Open Banking is mandated, standardised and centrally overseen.

The Open Banking Leaders: UK, Europe, Nordics

Europe is certainly a front runner when it comes to Open Banking, supported by legislation, but also because of the general drive for innovation in some of the more mature markets. Sweden, for instance, is a leading hub for pioneering fintechs and has a strong push towards debit payments, rather than credit. The UK has had Faster Payments in place for several years, which has helped to drive use of online bank transfer payments.

The Open Banking growers: Canada, LatAm, Asia Pacific

Canada, Brazil and Mexico have all taken determined steps to define legislation that will drive Open Banking, but each is taking a slightly different approach. Canada intends to include payments initiation within its open banking remit, while Brazil is taking a more phased approach. 

In May 2020 Brazil rolled out its regulations, which enable licensed institutions to share customer data (with the customer’s permission). The central bank in Brazil has set out a phased timetable, which is set to be completed at the end of 2021 and it hopes to encourage a range of Open Banking initiatives, including comparison platforms, financial management tools and more customer-friendly payment initiation processes.

In the Asia-Pacific region, the overriding view of Open Banking is very positive and there has been a flurry of corresponding activity in the past five years. For instance, in a recent survey by Accenture, 39% of SMEs and 43% of large corporations in Asia-Pacific said they already participate in Open Banking ecosystem platforms. Their top two aims were to access innovative banking services and to reduce the complexity and costs of connecting to banks.

The Open Banking followers: US and Africa

In the US, national legislation around banking is more complex because of the state-based legal and financial system. Despite this, many of the major banks are developing API-based services through partnerships, since they see the customer loyalty benefits of Open Banking as delivering competitive advantage. 

So, while Open Banking may not be driven by regulation in the US, it looks certain to be driven by the industry, who recognize the value it can offer for both consumers and businesses.

The African continent is one of the last regions to start developing Open Banking initiatives, but the intent is certainly there already in a handful of African countries. Financial exclusion is an enormous problem in Africa and Open Banking may offer the opportunity to improve the lives and financial well-being of many who currently struggle to access traditional means of conducting transactions.


Getting in on the Open Banking action

Open Banking has the potential to provide innovative services to consumers and support a simplified, more positive payments experience - from e-commerce purchases to loans and far more.

Open Banking also offers merchants and financial services providers the chance to lower their payments costs, improve their cash flows and reduce fraud – all extremely valuable opportunities. 

If they want to reap the customer and business benefits, it is clear that it is essential for merchants to implement Open Banking payments. However, this requires a full-service payments solution, which is not something that all Payment Initiation Service Providers can offer. 

First class consumer experiences demand first class solutions

Merchants can only support the best possible consumer experience with a complete payments solution. An initiation-only solution (where the service provider can support the initial payment, but nothing more) is not sufficient, since it cannot maximize value for either the consumer or the merchant. 

There are a number of key benefits that a best-in-class PISP must support including:

  • Automated, seamless and instant refunds

  • An embedded user interface at the checkout which is optimized for all devices, including mobile, tablet and desktop. 

  • Efficient reconciliation, to help merchants their reduce administrative burdens and increase the visibility of funds

  • Fast settlement, with an instant notification service. 

  • Seamless cross-border transactions, including multiple currency options.

  • The ability to support multiple payment models, including recurring or subscription payments


Trustly has been in this space for over 10 years and operates across Europe, leading the way in PSD2 payments. We connect to banks via multiple integration points that are embedded in the flow of funds, allowing us to mitigate risk, offer faster settlement through our intra-bank network and deliver state-of-the-art reconciliation.


Download the UK Open Banking provider comparison guide