Open Banking’s Contributions to Authorization Rates: Common Hurdles and Benefits for Businesses


Nandita Gupta, Vice President of Product for Commerce and Payments Platforms

This the third post in the Authorization Rates Series

In parts one and two of our Authorization Rates series, we discussed how PayPal has enabled industry-leading authorization rates through strategies such as network tokenization and data science, leading to increases in approval rates by as much as 400 bps. In this post, we will focus on authorization rates for a particular payment method: bank accounts.

Offering the option to use a bank account as a funding source can be a win-win situation for both consumers and businesses. For consumers, data shows that they are 78% more likely to shop with an online retailer if they see the logo of their preferred payment type at checkout. Having a variety of relevant payment options available at checkout and enabling payment choice allows consumers to choose the payment method that’s right for them.

For businesses, Open Banking -- which enables payment service providers to responsibly access consumer banking information through open APIs to help drive seamless customer experiences -- enables access to bank funds in near real-time. This can result in higher authorization and conversation rates, and a better customer experience all around.

Open Banking has been a growing trend in the industry because of its many advantages and is increasingly being leveraged to develop customer-centric experiences and products. According to various studies, Open Banking adoption is rapidly growing, even among small businesses, and a meaningful percentage of executives have shared that it’s one of their key innovation strategies.

Let’s take a look at some of the common hurdles that businesses face in accepting bank payments, four major benefits of Open Banking, and how PayPal is leveraging Open Banking for its customers.


Common Hurdles to Accepting Bank Payments

Many businesses may be deterred from offering bank payments because of the perceived risks associated with the use of a bank account as a funding source. Most of the time, bank network transactions are not real-time, which means the success or failure of a checkout transaction funded via a bank account may not be registered for a few days. This lack of real-time response can create a sub-optimal experience for a business. For example, it might require them to wait for funds before shipping the products, or they may choose to ship a product on time, but accept the risk of losses due to a failed transaction.

Yet globally, many consumers prefer to pay with their bank at checkout. This can vary by geography, consumer segment, and size of transaction, but we observe bank accounts being one of the top payment choices for customers. One major hurdle that buyers face in using their bank account is a lack of an easy and near-instant process to verify their bank and to prove availability of funds. For buyers, this may mean fewer payment options, which can lead to drop-offs or a less than ideal experience.

Over the last several years, PayPal has worked to fill these voids by creating secure flows for buyers to verify their bank accounts, and helping to manage the risk for businesses through advanced risk decisioning capabilities. These new flows, supported through machine learning and data science, enable bank accounts as a seamless funding option at the time of checkout. This ultimately helps take some of the onus off businesses, and at the same time helps lower decline rates and drive authorization rates.

Let’s look at the four key benefits of Open Banking.


Benefit Number 1: Increased Funding Choice and Improved Experience

In the past, there hasn’t been a way to quickly confirm the ownership of a bank account. Most payment service providers in the industry use a process called micro-deposits or random deposits. This entails sending a few small deposits (think a few pennies) of varying amounts to a customer’s bank and waiting for the customer’s bank to replay the amounts of these deposits back. However, the deposits themselves can take a few days to reach the customer’s bank, dragging the process out over days and leading to many drop-offs.

With Open Banking, when a user logs into their online banking portal, they are able to instantly verify bank account ownership and start using the bank account to pay. This makes the process, which typically stretches out over days, as simple as logging into one’s online banking account with a few clicks. This vastly improved and near-instant user experience results in increased verified bank accounts. When the time comes to transact, having a verified and ready to transact payment method can help to increase conversion.


Benefit Number 2: Enabling More Buyers by Enabling Bank Payments

In some situations, a legitimate user transaction that may seem out of the ordinary or risky could get declined due to risk and fraud precautions. When faced with such declines in the past, there was no way for the customer to easily verify their bank account and the availability of funds in order to recover this transaction. As a result, consumers had no choice but to either use a different payment method that they may not have preferred or worse, abandon the transaction altogether.

With Open Banking, customers are able to not only verify their bank accounts instantly but can also confirm their funds availability in real-time, thereby enabling payment service providers to accept these bank payments for businesses without any increased risk. This enablement of previously declined transactions helps improve authorization rates and revenue for the business.


Benefit Number 3: Reduced Losses for Businesses and Consumers

Businesses and consumers sometimes experience returned bank transactions for reasons such as lack of funds, incorrect or fraudulent accounts, or account malicious takeovers. These returned payments can result in additional fees for a customer, as many banks charge a fee when a bank debit is returned. PayPal’s advanced data models enable us to reduce returned bank transactions. With Open Banking data fed into our models, we can proactively identify such transactions and ask users to confirm the availability of funds or verify their accounts. This process proactively blocks transactions that could have led to losses for the business and fees for the consumers.


Benefit Number 4: Better Recovery Rates

In today's fast-paced world, consumers are often juggling multiple funding instruments, deposits, accounts and bills. These deposits and bills are often deposited and due on different dates, making it hard to track account balances at any given time. This sometimes results in an account with a low or negative balance, which can even result in a bank charging a return fee to the user.

Retrying these bank debits may not always lead to the recovery of funds and can instead make matters worse, resulting in continued returns or increasing bank fees for users for each retry. With Open Banking, PayPal is able to confirm availability of funds thereby optimizing the recovery process and helping to reduce failed retries, which may lead to improved recovery rates and reduced return fees for customers.

In summary, Open Banking enables payment service providers like PayPal to help more users easily pay with their bank, help approve more purchases with bank accounts, help drive higher authorization rates and help maximize revenue for businesses. As Open Banking capabilities continue to evolve globally, PayPal will continue to remain in front of unlocking new potential.

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