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How Open Banking Sparked a Revolution in Payments and Money Movement

May 31, 2024
Nick Rudy

Open banking is revolutionizing the way we think about money movement and management.

By unlocking banking data for third-party developers via application programming interfaces (APIs)—open banking suddenly shifted the trajectory of services, innovation and competition within the financial sector.  

Within this financial revolution, new forms of payment are emerging and thriving. This is largely due to the simplicity, security, and affordability of open banking payments. And it’s a big reason they’re disrupting the multi-trillion dollar payment processing industry.

“When you peel back the layers of the legacy way to solve digital payments, it was either make it easier to accept the card online, like Stripe or Square, or you could attempt something really grand, which was to go around the system,” Aeropay Co-Founder and CEO Dan Muller recently told TechCrunch

This post breaks down open banking payments with the details you need to understand the significance, implication, and trajectory these systems enable in an increasingly modernizing world. 

What is open banking?

Open banking refers to a financial services practice where banks and financial institutions enable third-party developers with access to consumer banking, transaction, and other financial information through the use of application programming interfaces (APIs). 

Open banking systems increase competition and innovation in the financial services industry, offering tailored financial products and services to consumers and improving user experience. 

Whether it's financial management, payment initiation services, or any other wide range of financial advancements, open banking enables a more transparent, cohesive financial sector.

What are open banking payments?

Open banking plays an integral role in the evolution of money movement—particularly when it comes to the way consumers pay (or get paid). 

How open banking payments work

Open banking payments leverage secure APIs to facilitate direct transfers of funds from a customer’s bank account to a merchant or service provider, often bypassing traditional payment intermediaries.

The process works like this:

  1. At checkout, a customer chooses an open banking payment option (i.e. digital bank transfer or “pay by bank”).
  2. The customer logs into their online banking account using their usual credentials—this initiates payment.
  3. Once authorized, the bank processes the payment through secure bank API calls.
  4. The funds are transferred directly from the customer’s bank account to the merchant’s bank account. This often involves using real-time payment networks, ensuring immediate or near-instantaneous transfer.
  5. Both customer and merchant receive immediate confirmation of the successful transaction.


Example of open banking payments

Digital bank transfers (also known as “pay by bank” or A2A) are the most widely used and fastest growing open banking payment method. 

Digital bank transfers allow shoppers to send payment to a merchant by linking their bank accounts, transferring the funds directly between customer and business banks. 

While pay by bank is already used by 36% of consumers, the payment method is quickly garnering widespread acceptance and consumer demand. These open banking payment gateways are more convenient for consumers, more affordable for businesses, and safer than traditional payment methods. 

Benefits of open banking payments

Open banking payments are rising in popularity because they deliver results. These are the key benefits: 

  • Faster, more direct payments and settlements: Direct bank-to-bank transfers eliminate the need for intermediaries like card networks and payment processors, speeding up the payment process. Open banking payments can also utilize real-time payment networks, ensuring immediate settlement of transactions.
  • Reduced costs: Bypassing traditional intermediaries reduces transaction fees for merchants and consumers. Plus operational costs are lowered due to fewer steps in the payment processing chain and less reliance on third-party processors.
  • Enhanced security: Bank-level encryption, fraud prevention and risk reduction measures protect sensitive financial data and maximize the security of each transaction. 
  • Transparency and control: Pay by bank payment solutions like Aeropay leverage a smart fraud engine that is selective about what transactions get let through, while still maintaining a high acceptance rate. 
  • Regulatory compliance: Open banking regulations establish standardized protocols for data sharing and payments, ensuring a level playing field for all market participants. At the same time, regulatory frameworks protect consumer data and ensure security for the end user.
  • Compliance in regulated industries: Particularly in highly regulated industries like cannabis and gaming, open banking payments bypass strict card network intermediaries, enabling businesses to process digital transactions without traditional debit or credit cards. 
  • Customization: Build a deeply embedded payment experience with solutions like Aeropay’s Payment API. Enable one-click checkout and provide a unique and seamless customer experience.


Will open banking put an end to traditional payment methods?

The way consumers pay hasn’t evolved much in the past couple decades—but that’s changing. 

New technology like NFC payments and mobile wallets are catching on fast, but there’s a more significant payments revolution bubbling to the surface—and it’s sparked by open banking. 

Pay by bank is a faster, more affordable, more secure, and more convenient payment method because it’s a direct transfer of funds from one bank to another. Cards can’t keep up as their transactions are processed through payment networks like Visa, MasterCard, or American Express, involving multiple intermediaries such as acquiring banks, issuing banks, and card networks.

Aeropay CTO Josh Lockhart explains the rising pay by bank model as an “ability to strip away the fluff from cards, lean on the strengths of banking, and facilitate a simpler money movement concept that’s actually more convenient.”

We’re entering a new era of money movement. Traditional payment methods now face heavy competition from pay by bank solutions. As consumers and merchants further adopt open banking payments, disruption will increase exponentially. 

Check out Aeropay’s pay by bank solution

Aeropay's platform seamlessly connects bank accounts using Aerosync, a homegrown bank aggregator that facilitates faster, more secure money movement. 

Our platform enables customizable integrations via a full suite of open APIs. The commercial impact for businesses is significant, with industry-high approval rates while minimizing return and fraud risk.

Book a demo to see how Aeropay can help your business.

Author

Nick Rudy

Content Marketing Manager
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