Open Banking vs Traditional Banking: A Clear Comparison

At its core, open banking facilitates the secure and efficient sharing of financial data between banks and authorised third-party providers. It enables customers to grant permission for their financial information to be shared, paving the way for a more tailored and streamlined banking experience. 

Third-party developers can build applications and services for the financial industry, providing access to a wider range of services from different providers and encouraging healthy competition. The end result is a financial ecosystem that makes it easier for consumers and businesses to manage their money, compare products and services, make payments, and better integrate financial services into business operations. 

Open banking uses application programming interfaces (APIs) to connect one system to another and allow them to communicate. APIs allow for cross-platform collaboration, so information can be shared seamlessly regardless of how each individual system operates or is coded. 

While both allow customers to make financial transactions, there are many differences between open banking and conventional banking methods. Let’s compare them on a broader scale before drilling down into the differences between specific payment methods. 

Data and security 

Open banking requires data to be shared with third-party providers to enable products and services to be delivered. This of course poses certain challenges surrounding data and security, which must be carefully regulated to keep consumers and their money safe. Open banking is regulated in the UK by the Financial Conduct Authority (FCA) in line with the revised Payment Services Directive (PSD2), and gives customers full control over their data. They can choose who it’s shared with and when,and can revoke that permission at any time. 

For traditional banking, data is fully controlled by the banks, although it’s typically not shared with other institutions. However, customers are often required to share lots of personal or financial information in order to carry out transactions, which can pose additional security risks. With open banking, customers can share the minimum data necessary for the product or service they want to use. The technology benefits from robust security measures, including secure APIs and stringent customer consent protocols, to strengthen data protection and safeguard against fraudulent activities. 

Product offering 

By enabling businesses of all sizes to access financial tech, open banking allows more organisations to offer a wider range of products and services, regardless of their size or experience. This means that the barrier to entry in the fintech space is much lower, allowing start-ups and small businesses to harness powerful technology through the use of APIs. 

With open banking, payment processes are faster and more efficient than with traditional methods, offering increased convenience and greater satisfaction for customers. It also means that businesses can offer a wider range of services, presenting a holistic approach to foster brand loyalty and trust. 

Impact on the financial industry 

By connecting a wide variety of different platforms, open banking offers businesses unprecedented access to financial data and services, breaking down the barriers of traditional banking silos. This encourages collaboration and the development of new technologies, which in turn feeds the wider financial industry. 

The sharing of data through APIs requires strict regulation and adherence to financial legislation, fostering a greater sense of trust and accountability in the banking ecosystem. This is an extremely positive development for banking institutions and consumers alike, as it promotes greater visibility and control over all financial activities. 

For consumers 

Open banking is faster, easier and more secure than card payments, making it particularly beneficial for online transactions. There’s no need for consumers to manually enter their card details, or trust a website to keep those details secure. Two-factor authentication can be used to approve transactions using a PIN, face ID or fingerprint, vastly reducing the risk of fraudulent activity. 

For businesses 

Open banking payments are mobile first and made for digital, so they provide a seamless payment journey that can help to boost conversion rates. While card payments take anywhere from 1-3 days to settle, open banking payments clear instantly, helping businesses to boost cash flow. The transaction fees also tend to be much lower than for card payments, allowing businesses to offer a smoother customer experience while also minimising their own costs. 

For consumers 

A standing order is a regular, fixed payment arrangement that can be set up by a bank account holder. While traditional banking requires them to contact their bank or access online banking software to set up a standing order, open banking can be integrated into an digital checkout process to create a regular payment mandate. This makes the process quicker and easier for consumers, and offers the enhanced security of open banking. 

For businesses 

Leveraging open banking so consumers can set up a standing order directly from your checkout page rather than having to visit a separate website or app helps to increase conversion rates. As the process is no more complicated than making a single purchase, it also allows you to more easily upsell ongoing or subscription-based services, increasing the lifetime value of each customer. 

Direct debits are similar to standing orders, with the key difference being that they are managed by the provider, not by the account holder, although they must give initial consent for the payments to be taken. Direct debits allow businesses to charge variable payment amounts, making them suitable for recurring payments that might not always be the same, such as utility payments. 

However, open banking in the UK currently does not support automated recurring payments with a variable amount. This means that the technology can’t be used for direct debits at present, although as open banking evolves and new regulations are introduced, it’s possible that this feature will be available in the future. 

For consumers 

Making a manual payment requires a lot of input from the consumer, and can be a tedious process. It involves logging into online banking and manually entering payee and payment information, and often requires additional verification such as through a card reader. Open banking allows these details to be pulled through automatically, making the process faster and less prone to errors. 

For businesses 

Harnessing open banking to allow consumers to make one-off payments quickly and easily, helping to boost conversion rates. Unlike manual payments, they don’t require manual processing and reconciliation, making the entire transaction more cost effective from a business perspective. The simplicity of making a payment also improves the overall customer experience, increasing brand loyalty and lifetime value. 

While traditional payment methods aren’t going anywhere for the time being, it’s important to embrace the opportunities that open banking has to offer. By adopting these versatile technologies, you can provide better customer service, engage in mutually beneficial collaborations, and future proof your business. 

Here are some of the top reasons why businesses are embracing open banking. 

Increased profits 

Open banking offers much lower transaction costs than traditional banking methods, so your business benefits from the full value of the sale. By offering a simple, straightforward method of making one-off or recurring payments, it can help to remove friction from the checkout process and boost conversion rates. Similarly, the convenience of open banking encourages repeat business, and makes it easier to upsell ongoing services such as subscriptions, increasing customer lifetime value. 

Real-time payments 

Open banking is powered by Faster Payments, meaning that funds clear almost instantly in your business account. This is beneficial for cash flow management, and means that there’s no need to chase payments. The automation and seamless cross-platform connectivity unlocked by open banking also minimise or completely eliminate the need for manual processing and reconciliation, freeing up time and resources for other business-critical tasks. 

Enhanced security 

With strict regulations in place, including the revised Payment Services Directive (PSD2), open banking payments offer enhanced security when compared to traditional methods. The mobile-first approach means that biometric authentication such as fingerprint or face ID can be used to minimise the risk of fraud. Open banking also enables payments to be made without the need to locally store sensitive payment information, giving customers the peace of mind that their data is safe. 

Open banking has already revolutionised the way businesses and consumers make and take payments, and it shows no signs of slowing down. In fact, by providing numerous benefits over traditional banking methods, this digital-forward financial development is poised to continue growing, creating even more new and exciting opportunities. 

By embracing this innovative approach, businesses can reduce costs, benefit from real-time payments to boost cash flow, and enhance payment and data security. For consumers, the added convenience and security provide a streamlined approach to payments, and offer greater control over their financial data. 

With its potential to transform the financial landscape, and its low bar for entry, open banking is an exciting tool for businesses of all sizes. As competitors adopt the technology, it’s important to consider how you can harness the power of open banking yourself, and provide your customers with the payment experience they expect.