Open Banking Payments

What Are Open Banking Payments? Definition and How They Work

Definition

Open Banking Payments is an account-to-account payment method enabled by regulated APIs that allow licenced third-party payment initiation services to instruct transfers directly from a consumer's bank account with their explicit consent.

How it works

Open Banking Payments operates on infrastructure created by bank API mandates, principally PSD2 in the EU/UK, which requires banks to expose standardised APIs to licenced Third Party Providers (TPPs). A Payment Initiation Service Provider (PISP) is the specific TPP category that permits initiating payments from consumer bank accounts.

The payment flow begins when a consumer selects Open Banking at checkout. The merchant's payment provider redirects the consumer to their bank's authentication interface, typically the bank's mobile app or online banking portal. The consumer authenticates and explicitly consents to the payment. The PISP then instructs the bank to initiate the transfer via the bank's API.

The underlying settlement rail depends on the market. In the UK, Open Banking payments typically settle via Faster Payments, providing near-instant settlement. In the EU, SEPA Credit Transfer or SEPA Instant is used depending on whether the consumer's bank supports SEPA Instant.

Refunds via Open Banking require a separate payment instruction; there is no native reversal equivalent to a card refund. Merchants must initiate a new bank transfer to the consumer, adding operational complexity.

Why it matters

Open Banking bypasses card schemes entirely, eliminating interchange fees (typically 0.3-1.5%) which is the primary cost driver for card acceptance. Faster Payments and SEPA Instant deliver near-instant settlement, improving cash flow versus T+1 or T+2 card settlement. Strong Customer Authentication is inherent in the Open Banking flow, reducing CNP fraud rates. Open Banking payments do not have a card scheme chargeback mechanism, reducing merchant chargeback liability. No native reversal means merchants must initiate separate bank transfers for refunds, adding operational overhead versus card refunds.

With PXP

PXP supports Open Banking payment initiation across UK and EU markets, connecting merchants to PISP infrastructure for account-to-account payments. PXP's integration handles the redirect flow, consent management, and reconciliation of Open Banking transactions alongside card payment data in a single reporting view.

Talk to a payments specialist

Frequently asked questions

How does Open Banking payment authentication work?

The consumer is redirected from the merchant checkout to their bank's own interface, typically the bank's app or online banking portal. There they authenticate using their bank credentials or biometrics. The bank then receives an instruction from the PISP to initiate the specified payment. Because authentication is handled by the bank directly, the merchant never sees the consumer's banking credentials.

What happens if an Open Banking payment fails?

Open Banking payment failures can occur at several points: the consumer may fail authentication at their bank; the bank API may be temporarily unavailable; the consumer may cancel the redirect; or the bank may decline the payment instruction. In most implementations the merchant's checkout detects a failed payment initiation and can offer the consumer an alternative payment method.

Can Open Banking replace card payments for all transaction types?

Open Banking is well-suited for high-value transactions where interchange savings are largest, B2B payments, and markets with high bank app adoption. It is less suited for recurring/subscription payments, cross-border transactions outside EU/UK, and markets where bank API coverage is incomplete. Open Banking is best positioned as a complementary payment method rather than a universal card replacement.

How does the refund process work for Open Banking payments?

Open Banking has no native reversal mechanism equivalent to a card refund. Merchants must initiate a separate bank transfer to the customer's account. The refund is a new credit transfer not a reversal of the original debit. Operationally this means refund processing for Open Banking requires a separate workflow from card refund processing.