Open Banking Vs Direct Debit Comparison in 2025

Customer expectations are ever-evolving, and so is the payments industry. Today, customers not only give importance to what they are investing in, but also how their payments are conducted. Each payment method comes with its own set of benefits, such as convenience, speed and security.

Direct debit is one of the leading payment methods today, known for its support for recurring payments. Open banking, on the other hand, is relatively new, but fast emerging as the quicker and more convenient payment alternative.

Between open banking and direct debit, which one serves the needs of subscription businesses better? In this article, let’s discover that by diving into the key features and differences of both.

What is Direct Debit?

Direct debit is a payment method that allows businesses to directly collect funds from the customer’s bank. The customer’s permission is, of course, required. Direct debit is popular with subscription businesses, and other services that require payments at regular intervals, such as memberships.

When customers select direct debit as their preferred mode of payments, they are required to sign a mandate. This mandate states the subscription’s terms and conditions, and asks permission for recurring payments.

Once customers provide their permission, subscription payments are automatically pulled from their accounts. They are then pulled at every billing cycle, without the customer having to provide permission again. Direct debit is popular because of the level of convenience it offers the customers.

Customers don’t have to fill in their bank details again and again. They only have to authorize the business once, and the business’s billing system takes care of the subsequent payment cycles itself.

Key Features of Direct Debit

These are the major characteristics of direct debit:

It is initiated by the business. Customers are required to authorize the merchant only once. The merchant then directly withdraws payments from their accounts on a recurring basis.

It doesn’t require cards as intermediaries. Cards are typically used as intermediaries to fetch money from a customer’s account. Card networks act as walls between the customer’s bank account and the business. Direct debit enables businesses to bypass these walls by directly getting in contact with the banks.

It ensures a consistent cash flow. Direct debit payments are automatically deducted from the customer’s account. Customers can literally forget about paying, after the initial authorization, and it won’t affect the cash flow. Payments would still be deducted at their specified times, promising predictable revenue for businesses.

It lowers the risk of failed payments. A major reason behind payment failures is the credit/debit card expiration. Direct debit doesn’t rely on cards. That is how it minimizes chances of payment failures. However, failures can still happen if the bank account itself is low on funds. In such cases, businesses need to implement automatic retries, or follow up with customers manually.

It takes 3-5 days to process payments. The exact duration depends upon the customer’s bank, and the region it operates in. This means that payments are not processed and transferred instantly.

What is Open Banking?

Open banking is a payment method that enables customers to share their account information with third party providers. These third party providers integrate with banks through open APIs. Open banking makes customers’ financial data accessible to authorized apps.

Data is only shared with financial service providers when customers approve. In fact, in this payment method, customers are the ones that initiate payment, not businesses. This streamlines payments and budgeting, as various apps can directly access customer’s bank account data.

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Third party providers also act as intermediaries between customers and businesses. When customers need to make a payment via open banking, they authorize the service providers to transfer funds from their accounts to the business’s account.

Thus, just like cards serve as the middlemen in traditional banking scenarios, financial service providers act as intermediaries in open banking. However, open banking payments are faster than card payments, as service providers integrate with banks directly.

Key Features of Open Banking

These are the major characteristics of open banking:

Payment is initiated by the customer. Whenever payment is required, the business needs customer approval. In order to approve, customers log in to their banking app or website. In the banking app, they are shown the transaction details for approval.

Once the customer approves, the third party provider transfers their payment securely to the merchant. This process ensures that the customer’s account information is not shared with the merchant.

Payment is processed in real-time. Open banking allows instant money transfers.

It doesn’t require cards. The only intermediaries here are authorized third party apps that enable fund transfer between customers and businesses.

Automatic payments are not supported. Customer approval is mandatory each time a payment is due. This means that open banking doesn’t allow automatic recurring payments yet.

Open Banking Vs Direct Debit: Feature-By-Feature Comparison

Now that we have understood how direct debit and open banking work, it is time to conduct a detailed feature comparison between them. This comparison will ultimately decide which payment option is the best match for subscription businesses.

1. Automated Recurring Payments

Direct Debit: It facilitates automated recurring payments. It connects the merchant directly with the customer’s bank. Merchants can set up a recurring payment cycle using the customer’s account. Customers only have to approve recurring payments once. They take place automatically after that, at specified intervals.

Open Banking: Payments are one-time, instead of being recurring and automated. Customers approve each and every transaction manually by logging in to their banking app or website.

2. Customer Control

Direct Debit: Lesser customer control as compared to open banking. Customer approval is required only once for subscription payments. Businesses continue collecting customer payments directly from their accounts until subscription is cancelled.

Open Banking: It allows customers greater control over their payments. Recurring payment workflows cannot be set up, so customers approve every transaction manually.

This grants customers more authority, as technically their subscription payments can’t continue automatically in the background. Customers are reminded of subscription renewal every time, so that they can pay actively.

3. Payment Processing Speed

Direct Debit: It generally takes 3-5 days for payment to get processed. The transfer speed is much slower compared to open banking.

Open Banking: Payment transfer takes place almost instantaneously. Open banking is preferred due to its speedy transactions.

4. Payment Failure Rate

Direct Debit: This has higher chances of payment failure. Payment failures can occur if the customer’s account doesn’t have enough funds for payment. Or, if their banking app is going through a downtime.

Moreover, businesses can’t know about the failures in real-time. They often get to know about that after a considerable amount of time has passed (such as a few days). They cannot implement dunning strategies timely.

Open Banking: Payment failure chances are lower. That is because customers don’t manually share their bank account details. This means that there can’t be errors in those details causing payment to fail.

Moreover, customers verify payments in real-time. If any failures occur, businesses are notified in real-time as well, so they can coordinate with the customer timely.

5. Payment Processing Fees

Direct Debit: It charges lower fees as compared to card networks, but generally higher fees as compared to open banking. Alongside direct debit payment providers, banks might also charge a fee per transaction.

Additionally, businesses have to pay a payment provider fee each time a customer payment fails. These fees can pile up overtime.

Open Banking: Fees are generally lower, as payments are more direct with lesser intermediaries in between. Chargeback risks are also minimized as customers approve each transaction themselves. This prevents fees associated with chargebacks.

6. Dunning Management

Direct Debit: Allows automatic payment retries in case of payment failures. However, each retry may incur extra fees as well.

Open Banking: Doesn’t allow automated retries. In case of payment failure, businesses must rely on payment reminders, and actively communicate with the customer to resolve issues. They can also offer customers other payment methods to complete payment.

Open Banking Vs Direct Debit: Security Comparison

Before making the final decision, let’s explore the security characteristics of both the payment methods as well:

Direct Debit

Mandate Approval: Customers must sign a mandate to give businesses permission for automatic recurring payments.

No Real-Time Verification: Customer’s account details are not verified every time the payment is due. Verification takes place only for the initial transaction. If customer account is blocked after that, or is low on funds, businesses are not notified instantly, leading to payment failures.

Chargeback Protection: Customers can easily initiate chargebacks, sometimes even unfairly.

Mandatory Compliance: Businesses store customers’ bank account details directly to conduct recurring payments. This means they have to comply with data security standards to ensure that customer data is not abused.

Open Banking

Strong Customer Authentication (SCA): Payments take place directly via the customer’s banking app. The banking app implements SCA measures, such as biometric verification, and facial recognition. Payment is only approved after successful verification.

No Data Storage: Businesses are only connected to the customer’s bank via third party providers. They cannot view or store the customer’s account details. This reduces their need to comply with data security standards.

Lesser Chargeback Risks: Customers verify each business transaction themselves. This minimizes the possibility of chargebacks.

More Transparency: Sensitive bank account information is not shared with businesses, so merchants cannot conduct unauthorized payments. In addition, each payment is approved by customer in real-time. Customers can proactively keep track of exactly where their payments are going.

So Which Payment Method for Subscription Businesses?

Both direct debit and open banking are strong contenders for subscription payments. They offer payment convenience and security in their own unique ways. Therefore, your choice between open banking vs direct debit depends upon your business requirements.

If you want to leverage smooth recurring billing cycles, opt for direct debit. Direct debit eliminates manual intervention, for both businesses and customers. Once an automated recurring payment cycle is set up, it continues uninterruptedly until the subscription is cancelled, or payment failure occurs.

Meanwhile, you can go with open banking if your customers desire more control over their subscription payments. Even though open banking facilitates one-time payments, instead of automated recurring billing, the payment security level and speed is still unrivalled.

This means that in the open banking model businesses have to manually request payment each time it is due, and customers have to manually approve it as well. However, this effort can be worth the other advantages that open banking offers.

How SubscriptionFlow Helps

SubscriptionFlow is an adept subscription billing platform that offers multiple payment methods including direct debit and open banking.

We power seamless recurring billing cycles via direct debit, and automate smart dunning to maximize revenue recovery. Our expert automation enables businesses to relax and enjoy consistent revenue flows.

We offer convenient open banking options for customers that don’t prefer automated payments. SubscriptionFlow ensures frictionless open banking payments, and automates personalized payment reminders in case of failures.

Get onboard SubscriptionFlow today to get the best of both worlds! Smoothly collect subscription payments via the payment method of your choice.