The powers of Open Banking for refunds and pay-outs

The benefits of Open Banking as a payment (pay-in) mechanism have been well spoken about – it provides merchants with a fast, secure and cost-effective option to accept funds from customers.

Less well spoken is the potential for Open Banking to power outgoing payments – whether that be simple refunds to customers (e.g. in eCommerce), or more broadly for pay-outs to customers (e.g. insurance claims). In fact, reversing Open Banking payments can be a fast, customer friendly, and risk reducing pay-out option when compared to existing solutions in the market today.

Refunds and pay-outs today

Pay-outs to customers are made in a variety of sectors. This includes retailers refunding part or all of a purchase, insurers paying claims, financial services supporting fund withdrawals, or even travel providers sending compensation to customers. However, existing payment mechanisms have limitations.

While card schemes have developed strong refund solutions, returning funds via cards has restrictions. Funds are not typically credited to a customer’s account in real-time, but take time to appear on statements. Refunds are restricted to no more than the original transaction amount, reducing a merchant’s ability to send higher amounts – i.e. if they want to provide any form of compensation. And limits apply to how long after an initial transaction a refund can be made, a challenge for sectors such as travel and insurance.

The other alternative is pay-outs via bank transfers – either over the Faster Payments Scheme (FPS) in real time in the UK, or via BACS which takes a couple of days. The challenge here is merchants are reluctant to make pay-outs to a customer’s bank account without validating the account information first. And while there are some validation tools in the market today, these are costly and unreliable. Anecdotal evidence suggests a failure rate around 50%, meaning merchants resort to sending payments via cheque – an even more expensive, slow and antiquated option which fails to meet the expectations of customers today.

So how can Open Banking help you reduce your risk and deliver a better experience for your customers?

With Nuapay, if a merchant receives a customer payment via Open Banking, the merchant can also send a refund or pay-out back to that customer automatically – without the customer needing to provide their account details. This payment can be made in real-time, ensuring a customer receives the funds immediately, and thereby reducing hassles and complaints that the merchant might receive from a customer.

And because this is processed a standard outbound credit transfer, there is more flexibility than existing pay-out solutions.

For example, merchants can issue refunds (full or a partial amount) but also have the added flexibility to process amounts in excess of the initial payment. Refunds can also be processed for a longer-time period – at least 5 years – after the initial transaction. This powers a wider range of uses, such as enabling travel providers to return funds and pay compensation to a customer well after the original ticket was purchased, or helping retailers to delight their customers with some additional cash-back if there are issues with a product down the track (e.g. during a warranty period).

Equally importantly, is the ability to reduce risk. Pay-outs via this method ensure that funds are returned to the initial payer’s account, reducing the opportunities for fraud or money-laundering. For example, when insurers pay claims, significant effort is made to validate the policy holder owns the account before payment is made to reduce the risk of fraud. By guaranteeing funds are returned to the initial payer, there is less scope for a fraudulent claims. Equally, for sectors such as gambling which are more susceptible to money-laundering, paying out any winnings back to the original account helps to put in place additional AML controls.

So the Open Banking refund or pay-out options provide a better experience all round – a more flexible option for merchants, a faster and better experience for customers, all while reducing the risk in the system.


About Nuapay

Nuapay is a pioneer of Open Banking and is the industry’s leading provider of Account-2-Account payment solutions. Building upon the trust, scale, and experience of our parent company, Sentenial, we securely process ~£40bn in payments every year for many of the world’s leading Banks, payment providers and merchants.

Today, we offer our partners a comprehensive A2A payment solution. Our Open Banking products are unique in today’s market: Refunds? No problem. Instalment plans? We power it.  We also offer customers our Direct Debit, Credit Transfers and Instant Payment products all through one platform, giving you a full payment solution powered by our Nuapay accounts, and easy to integrate through our industry leading APIs.

We continually work tirelessly to reinvent what’s possible with our banking and payment solutions, removing inefficiencies and unnecessary costs, saving you time, money and resources at every turn.

This is payments as it should be.

Learn more about Nuapay here.

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