Open banking and credit cards are two distinct payment methods with their own advantages and disadvantages. While open banking is gaining traction as a more convenient and cost-effective alternative, it is unlikely to completely replace credit cards anytime soon. Let’s take a closer look at how each payment method works and compare their key features.

How Credit Cards Work

Credit cards allow consumers to make purchases and pay for goods and services later. When a customer makes a purchase with a credit card, the merchant’s bank (acquirer) sends the transaction details to the customer’s card network (e.g. Visa, Mastercard). The card network then forwards the request to the card-issuing bank, which approves or declines the transaction based on the customer’s available credit limit and payment history. If approved, the merchant receives a guarantee of payment from the card network. The customer is then billed for the purchase amount, typically with an added interest charge if the balance is not paid in full by the due date.

While open banking offers benefits such as lower transaction costs and faster payment processing, credit cards still provide significant advantages that make them appealing to consumers. They play a crucial role in building credit history, which is essential for obtaining loans and mortgages. Credit cards also come with robust fraud protection and chargeback options, allowing consumers to dispute unauthorised transactions or issues with purchases. Additionally, many credit cards offer rewards programmes, cashback, and travel points, enhancing the consumer experience. Furthermore, credit cards are widely accepted across various merchants and platforms, making them a familiar and trusted payment method that many consumers prefer over newer technologies like open banking.

How Open Banking Works

Open banking refers to a regulatory framework that enables consumers to securely share their financial data with third-party providers (TPPs) and banks using application programming interfaces (APIs). This allows for the development of innovative financial products and services, including account-to-account payments.

To make an open banking payment, the customer selects their bank from a list and authenticates the transaction using biometric identification, such as fingerprint or facial recognition. The payment is then initiated directly from the customer’s bank account to the merchant’s account, without the need for card details. This process is faster and more secure than traditional card payments, as there is no sensitive information exchanged or stored by the merchant.

Some of the examples of open banking APIs:

Plaid: A leading account aggregation platform that connects over 11,000 financial institutions in the US, UK, Canada, and Australia.

Tink: A European open banking platform that offers account aggregation, payment initiation, and personal finance management services.

DAPI: Based in the UAE, DAPI offers a financial interface that allows fintech applications to implement open banking, facilitating secure payments and real-time banking data access, thus bridging the gap between banks and fintech companies.

Comparing Key Features

Cost: Open banking payments are generally cheaper for merchants, as they avoid the interchange fees and processing costs associated with credit cards. According to Acquired, open banking payments can be up to 80% cheaper than card payments.

Speed: Open banking payments settle instantly, while credit card transactions can take 1-3 days to process. This faster settlement provides merchants with quicker access to funds and improved cash flow.

Security: Both open banking and credit cards use encryption and authentication measures to protect against fraud. However, open banking eliminates the need for merchants to store sensitive card data, reducing the risk of data breaches.

Conversion rates: Open banking payments have higher conversion rates compared to credit cards, with success rates exceeding 95% in some cases. This is due to the streamlined user experience and reduced payment failures.

Open Banking in the MENA Region

The Middle East and North Africa (MENA) region is seeing increasing adoption of open banking, driven by regulatory initiatives and growing consumer demand for digital financial services. In the UAE, the Central Bank has issued open banking guidelines, while Saudi Arabia has launched the Open Banking Programme as part of its Financial Sector Development Program 2020.

As open banking gains traction in the MENA region, it presents an opportunity for merchants to offer a more convenient and cost-effective payment option to their customers. However, credit cards are still widely used and accepted, and it will take time for open banking to fully establish itself as a mainstream payment method in the region.

The way forward

While open banking offers several advantages over credit cards, it is unlikely to completely replace them in the near future. Both payment methods have their own strengths and are likely to coexist, with open banking gaining market share as more consumers and merchants adopt the technology. Ultimately, the choice between open banking and credit cards will depend on the specific needs and preferences of each merchant and customer.

Check out our Open Banking Training Programmes to learn more, or contact us directly for further details: wa.link/99by66