The Payments Landscape Is Changing
For decades, moving money meant working through a tightly controlled network of banks, card schemes, and clearinghouses. Transactions were slow, opaque, and expensive — particularly across borders. The emergence of open banking is fundamentally challenging this model, enabling a new generation of faster, cheaper, and more transparent payment experiences.
Understanding the difference between open banking payments and the traditional payments infrastructure is essential for anyone working in or building for the financial technology space.
How Traditional Payments Work
Traditional payment flows — whether card-based or bank-transfer-based — involve multiple intermediaries:
- A consumer initiates a payment at checkout.
- The payment request goes to a payment processor or acquiring bank.
- The request is routed through a card network (Visa, Mastercard) or interbank network.
- The issuing bank authorizes or declines the transaction.
- Funds settle — often 1–3 business days later.
Each intermediary in this chain takes a fee, contributing to the 1.5–3.5% interchange costs that merchants absorb on card transactions. Settlement delays create cash flow challenges, and the system is largely invisible to end users.
What Is Open Banking?
Open banking is a regulatory and technical framework that requires banks to share customer financial data — with the customer's consent — via secure APIs. This allows third-party payment providers to initiate transactions directly from a user's bank account, bypassing the card network entirely.
A payment initiated through open banking typically works like this:
- The user selects "Pay by Bank" at checkout.
- They are redirected to (or shown) their bank's authentication screen.
- They authorize the payment directly.
- Funds transfer via the national faster payments rail (e.g., Faster Payments in the UK, SEPA Instant in Europe).
Head-to-Head Comparison
| Attribute | Traditional Card Payments | Open Banking Payments |
|---|---|---|
| Cost to merchant | 1.5–3.5% interchange | Typically much lower |
| Settlement speed | 1–3 business days | Near-instant (where rails support it) |
| Fraud liability | Chargeback risk on merchant | Strong customer authentication reduces fraud |
| Consumer experience | Familiar, widely accepted | Newer, requires bank redirection |
| Global acceptance | Very broad | Still developing internationally |
Where Open Banking Payments Excel
- High-value transactions: For mortgage payments, insurance premiums, or large e-commerce purchases, the cost savings on interchange are significant.
- Subscription billing: Variable recurring payments are difficult with card mandates but straightforward with bank-to-bank rails.
- Financial services: Funding investment accounts, loan repayments, and tax payments map naturally to bank-transfer flows.
The Road Ahead
Open banking payments still face real adoption hurdles: consumer familiarity, inconsistent bank API quality, and limited cross-border support. However, regulatory momentum — particularly in the UK, EU, Brazil, and Australia — continues to push the infrastructure forward. As real-time payment rails expand globally and consumer trust builds, open banking payments are positioned to become a mainstream alternative to card-based transactions for a growing range of use cases.