Open banking refunds: How do they work?
From instant settlements to lower costs, much has been made of open banking pay-ins. But what about refunds? Why hasn’t there been as much noise surrounding them, considering they’re essential e-commerce functionality?
The simple answer is that, until recently, the infrastructure simply hasn’t been there to support them. Merchants receive funds directly from customers’ bank accounts. With no account data shared, how can an open banking payment be refunded?
The limitations of PSD2
Because this issue isn’t addressed by PSD2’s Regulatory Technical Standards, the onus has been on third parties like Volt to devise solutions that, by delivering the necessary functionality, also help open banking payments realise their operational potential.
Granted, the UK’s largest banks are required to support ‘reverse payments’ under the Open Banking Standard. Merchants, though, need to obtain customer account details from the banks. It’s not possible to retrieve this from the information that comes with an inbound payment. Customers must also consent to having their information shared, which creates additional friction.
And, of course, ‘reverse payments’ are limited to the UK. There’s no such initiative in Europe. The only refund-related topic that PSD2 addresses relates to SEPA Direct Debits.
Building the infrastructure for open banking refunds
So, how did we go about making open banking refunds a reality? Well, we first had to give merchants full visibility of their incoming payments. This is achieved via Connect, our cash management suite, where we issue merchants a multi-currency virtual IBAN via one of our banking partners.
Aside from assigning payments an ID and tracking their status, Connect is able to provide – in full compliance with GDPR – payer information such as name, account number and sort code. It’s worth reiterating that this level of detail isn’t available with open banking payments per se, as no account details are shared.
How to initiate an open banking refund
This information enables merchants to initiate a closed-loop payment to customers who request a refund – either via Fuzebox, our merchant portal, or API (‘closed loop’ because the open banking refund is tied directly to the open banking payment). The payment settles near instantly, without the customer having to log in to their bank account to authorise it. This compares very favourably to card refunds, which can take up to 10 days to arrive. Faster refunds equals happier, more loyal customers who spend more.
The impact on a merchant’s cashflow, too, is worth emphasising. An instant pay-out, originating from an instant pay-in, is logistically far easier to manage. Say you’re a fashion retailer and you receive an order for a pair of jeans. The customer pays via card and, on receipt of the jeans, realises they’ve ordered the wrong size. They request a refund that the merchant is obliged to honour, despite the original card payment still not having settled.
This frustration is often passed on to the customer in the form of a delay. Refunds take up to 10 days because the incoming card payment needs to arrive in the merchant’s account before it can be ‘reversed’ (which, of course, is just as slow). Where the delay isn’t passed on, the merchant must still contend with cashflow complications.
Full and partial refunds
We’re able to process both full and partial refunds and, where needed, multiple partial refunds – for up to a year after the incoming payment was received. This is essential for aforementioned fashion retailer, which needs to process partial refunds on orders of multiple items as a matter of course. When they’re processed, merchants receive a notification via Connect. That’s really all there is to it.
Open banking payouts
Just as crucial for some merchants as refunds are payouts, or outbound payments that aren’t directly related to an incoming payment. For financial services companies – everyone from investment platforms to e-wallets – this is business-critical functionality.
It’s critical, also, that the payout process is optimised – for customers as well as merchants. For the former, instant payouts foster trust, which in turn builds loyalty and increases the likelihood of them spending more. In the case of an investment platform, for example, instant payouts equate to more liquidity, and therefore further investments.
For the latter, you just have to compare card payouts with open banking payouts. Cards, with their inherent delays, exacerbate the cashflow challenges caused by incoming and outgoing payments of different amounts. Open banking, by virtue of being instant or near-instant, offers greater cashflow control as standard.
Further, by integrating Verify, our AIS solution, merchants can automate the process of confirming customer bank account ownership – which, in some countries, they must do before initiating an open loop payout (‘open loop’ because the open banking payout can be processed on the back of a card deposit).
As with refunds, payouts can be instructed to be sent, via the Volt API, directly from your virtual IBAN, subject to available funds.
Learn more about how open banking refunds work with Volt via our Resource Centre.