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Why open banking is leading the way in payment authorisation rates
Mon, 16th Oct 2023

Open banking reached a significant milestone in July 2023, surpassing 11.4 million payments. With a 102.4% growth from the previous YTD stats, the groundbreaking financial technology is fast becoming the must-have for merchants across the UK, Europe and Asia. 

By incorporating open banking with a customer-centric approach, the payment landscape is rapidly transforming, forcing businesses to adapt or get left behind. From more comprehensive collections in the lending and retail sectors to enhanced financial management and customised payment choices for customers, the enormous month-on-month increase in users reflects the pace at which open banking is changing the digital landscape whilst serving as the driving force behind increasing financial inclusion, innovation, and consumer empowerment. 

In July 2023, the number of active payment users surged to 4.2 million, showcasing a substantial 10.5% rise from June 2023 and an impressive 68.2% surge from July 2022. Such substantial growth figures serve as proof that consumers are utilising open banking more and more to manage their finances. 

In addition to benefiting the consumer by offering them a streamlined payment experience, open banking payments tend to have higher success rates compared to card payments. Leading the frontier in payment success rates, open banking boasts an impressive 97% authorisation rate, digital wallets like Apple Pay have a slightly lower 94%, one-click checkout follows with 85% success, and standard authorisation and traditional card payments demonstrate a significantly lower 70% success rate. 

What are the main causes of declined payments?

So why are payments being declined across the differing payment methods? What are the primary factors contributing to this loss of income for businesses? 

The reasons for declined payments vary depending on the payment method and consumer. Whilst open-banking's account-to-account nature minimises the risk of manual errors or payment failures with accurate and up-to-date payment information, the pitfalls of other methods are far greater. 

Ensuring a seamless customer journey and maintaining consumers' attention without unnecessary obstacles becomes paramount. When using one-click payment methods, there may be some instances where the stored information becomes outdated or requires re-verification, leading to a slightly lower success rate. 

Human error is a factor that can play an even larger role when repeatedly inputting card information. Anything from expired card details, insufficient funds, or declined transactions due to fraud prevention measures can cause declined payments. 

What factors cause a lower authorisation rate?

In addition to human and card detail-related issues, banks and payment handlers can create numerous issues for successful transactions to occur. With a rising wave of fraudulent banking activity, so does the amount of precautions and limitations set in place by providers, making potentially perfectly legal and intended payments incredibly difficult. 

Cross-border transactions may be declined due to the numerous automated and manual compliance checks involved, leading to unnecessary transaction declines as compliance checks vary with payment gateways and banks. 

Certain 'high-risk' industries are often the victim of lower payment authorisations. Industries such as online gaming, adult entertainment, and tech support are often regarded as more vulnerable. Payment processing scams are schemes designed to deceive businesses into providing sensitive financial information or making fraudulent payments. 

How are businesses affected by declining authorisation rates? 

In the European Economic Area alone, failed payments are estimated to cost more than $40 billion per year in fees, labour and lost business. Although 94% and 85% success rates still appear reasonably positive, taking that into account as potential lost income of 6% and 15% is a much more startling figure. 

The loss to the business goes much deeper when one considers the long-term effects on the company's brand. Declined payments lead to a rise in customer frustration, often leading to abandoned carts rather than persistence, and consistent failed payments reflect poorly on the merchants, leading to an unreliable and difficult reputation with potential consumers. 

How to help business boom

Optimising the checkout process to be more customer-friendly can help increase authorisation rates by ensuring customer frustration stays at a minimum. So how does this work? For starters, UX and UI can play a key role in increasing your conversion rate. Forbes states that "a well-designed user interface could raise your website's conversion rate by up to 200%, and a better UX design could yield conversion rates up to 400%."

Taking extra measures to protect against fraud can help reduce false positives, but communication is key, too. Informing customers about any potential declines and providing support where needed can go a long way in maintaining trust with consumers.

The use of multiple payment methods provides a safety net against declined payments. Cascading payments involves distributing transactions through multiple payment gateways or channels using smart routing. If a transaction is declined through one channel, it's moved on to the next for approval. This gives each transaction a higher chance of approval.

What does open banking do differently? 

When it comes to authorisation rates, open banking payments tend to have higher success rates than card payments and digital wallets, making it no wonder why so many are adopting this new business model. 

Open banking, by nature, is an instant account-to-account transaction; the real-time verification of funds availability in the customer's account reduces the likelihood of declined payments due to insufficient funds, as the account balance is checked at the time of authorisation.

Open banking customers authorise the payment directly from their bank account using secure APIs. This eliminates the possibility of errors in inputting card details or using outdated payment information, which can lead to payment failures. 

Finding the right open-banking provider that works alongside you to optimise your API integration is arguably even more important. The best providers on the market provide top-tier technician support to ensure a seamless intergeneration, with holistic approaches to individual merchant needs, whether advanced fraud protection or tailored industry solutions.