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Payment Initiation: All you need to know & how to get started

Modulr By Modulr on 9 November 2023   •   11 mins read
<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Payment Initiation: All you need to know & how to get started</span>

If you’re a business researching information on Payment Initiation, you may want to know if this service can help you improve your current payment functionality. For example, you may be:

  • Processing large-volume or high-ticket transactions via card payments that can take up to three days to settle in your account, which can delay the release of goods or services and have a negative impact on customer loyalty and brand reputation.

  • Using traditional bank transfers that require customers to logout of your platform and login to their banking application to manually key in data (increasing the risk for error). This process can also seem outdated and unprofessional to today’s customers, who are used to smooth digital experiences.

  • Seeing an increased chance of drop-off or abandonment during the bank transfer process, as the customer leaves your payment ecosystem to complete the transaction.

Fortunately, Payment Initiation can help you overcome many of your account-to-account payment challenges. 

In this guide, we’ll cover:

Modulr’s Payment Initiation Service (PIS) helps settle funds faster, reduce fraud, and deliver a better customer experience. All from one powerful platform. Contact us today to learn more.

What is Payment Initiation?

Payment Initiation is a fast, cost-effective alternative to accepting card payments and bank transfers. It enables customers to connect to their bank or financial institution, also known as Account Servicing Payment Service Provider (ASPSP), to authorise an Open Banking payment to a third party. Payment Initiation helps avoid the transfer of sensitive information, like debit or credit card details or financial data, to multiple parties involved in payment processing.

What are the benefits of Payment Initiation?

For merchants or businesses that accept payments, the benefits include:

  • Real-time settlement and notifications

  • Reduced risk of fraud

  • Reduced risk of chargebacks

  • Lower costs

  • Better customer experience

  • Easy-to-process refunds

How Payment Initiation works

Payment initiation is the start of the Open Banking payment transaction that works via API technology.

When a customer agrees to an Open Banking payment during the checkout phase, a PISP automatically redirects your customer to the customer’s bank or building society to authorise a single or recurring payment with you.

What is a Payment Initiation Service?

A Payment Initiation Service acts as an Open Banking payment bridge between an online platform or merchant and a customer’s bank.

When a customer is on your checkout page and selects “instant bank transfer” as their payment option, the Payment Initiation Service begins. PIS works via an API to redirect your customer to an interface where they connect to their financial institution to authorise payment. Once they insert their credentials, the PIS automatically brings them back to your platform to complete the transaction.

How did the Payment Initiation Service start?

Open Banking triggered the creation of Payment Initiation as an alternative payment method to cards. 
Card payments are a popular payment method in the UK and many merchants rely on them, especially during the Covid-19 pandemic. According to UK Finance, in 2021, the volume of debit card payments increased by 23%, reaching 19.5 billion out of the total 40.4 billion payments made in the UK. Credit cards made up 3.4 billion payments.

However, cards may not be an ideal payment method for all use cases or payment profiles. Card payments are complex, involving several parties – payment gateways, card schemes, acquiring banks and issuing banks. This payment processing involving multiple parties can create drawbacks, such as:

  • Multiple fees for merchants, which can be expensive if transaction volumes or values are high.

  • Slow settlement times that can take up to three days, which creates a slow release of goods or services by merchants.  

This complexity paved the way for Open Banking and the start of Payment Initiation. With Payment Initiation, customers can pass from a checkout page to their banking provider to authorise a payment smoothly, without sharing sensitive information.

What is a Payment Initiation Service Provider (PISP)?

Payment Initiation Service Providers (PISPs) are third party organisations that can initiate Open Banking payments on behalf of customers.

What’s the difference between Payment Initiation Service Providers and Account Information Service Providers (AISP)?

As an external party authorised to initiate Open Banking payments on behalf of your customers, a PISP takes an active role in bringing the customer to their online banking through an API-driven interface where they can authorise payment. After, the PISP will redirect the customer back to your platform where they’ll complete payment.

An Account Information Service Provider (AISP) is authorised only to view bank account information in an Open Banking environment, without participating in the payment transaction or authorisation process. An AISP will play a “read-only” role in checking the customer’s bank account data to see if they have enough funds to complete the transaction. 

How to implement Payment Initiation with Modulr

Modulr is registered with the Financial Conduct Authority (FCA) and the UK’s Open Banking organisation as a Payment Initiation Service Provider (PISP). This means we have authorisation to initiate payments on behalf of a user from their bank account.

With Modulr, you can accept payments directly from your customers’ banks – the process is as easy and streamlined as accepting card payments. Payment Initiation is available via Modulr's API, which automatically redirects your customers to their bank or building society so they can make payments smoothly and efficiently.

Our Payment Initiation is also a cost-effective alternative for merchants and businesses alike as it cuts out most intermediaries.

How Modulr's PIS works

Here’s how Modulr’s PIS works when one of your customers selects ‘Pay by Bank’ on your checkout page:

  1. Your integration with Modulr automatically calls our API to get a list of banks – here your customer selects their financial institution.

  2. Our automatic redirect brings your customer to their bank’s URL or app to authorise payment that is pre-filled with their usual banking credentials.

  3. Once customers verify their payment, we automatically redirect them back to Modulr and instantly onwards to your completion page.

  4. All transactions are made via Faster Payments rails, so funds transfer immediately from the customer’s bank to your electronic money account at Modulr.

For your customer, it only feels like a three-step checkout:

  1. They choose their bank.

  2. Once redirected to their bank, they authorise payment.

  3. They’re directed back to your payment completion page.

With Modulr, they no longer need to go through the hassle of manually entering payment details, sort codes or account numbers.

Unlike other PIS offerings on the market, Modulr’s Payment Initiation connects natively with our core payment accounts. This means you can:

  • Receive instant confirmation that funds have settled.

  • Easily process refunds.

  • Benefit from real-time automatic settlement (which can save significant time and reduce the cost of manual reconciliation).

PISP 1-1

Want to get your developers on board? Have them check out our API documentation on Payment Initiation.

How to set up fixed recurring payments with Modulr’s Open Banking Standing Order 2.0

Using our Payment Initiation Service, you can take your customers directly to their bank to set up recurring payments, offering an unrivalled, straight-through user experience.

Standing Orders created with Open Banking work much in the same way as traditional instructions but with a unique difference. Your customer no longer needs to go to their bank account to set up a fixed recurring payment with you manually. They can enjoy a single customer journey directly with payment initiated from within your business’s mobile app or website.

Recurring payments set up this way are cheaper than other payment methods because you’ll be paying a single flat fee for each successful transaction instead of incurring multiple costs spread over several intermediaries. There’s more security thanks to Modulr’s API-powered Payment Initiation so your customer has a fluid payment flow, passing from your checkout page directly to their bank, without having to deal with a third-party. Our Open Banking Standing Order 2.0 is also less prone to error – you can pre-fill the payment details for your customer for an overall easier payment experience.

Find out more in our Standing Orders product guide.

Why choose Modulr as your Payment Initiation Service Provider?

Modulr is a software-driven embedded payments provider helping multiple verticals scale their business through better payment systems. 

With a single integration through Modulr’s single application programming interface (API), you can tap into a full suite of payment solutions, including Payment Initiation and Open Banking for real-time payment collections.

When you choose Modulr as your PISP, you’ll get a range of additional benefits and extra functionalities, including:

Faster settlement

Unlike other PISP offerings on the market, Modulr's Payment Initiation Service provides instant confirmation of account-to-account payment and settlement. If you’re a marketplace, this means your sellers will see cash arrive in their accounts much faster, positively impacting their liquidity and earned interest.

Real-time notifications for easy reconciliation

You can create electronic money accounts where funds can land safely. Set up automated webhooks to notify you in real-time when money arrives. Our API-powered payment solutions make payment reconciliation and refund processing easier.

Lower costs

Card payments are expensive, with merchants paying a percentage on each transaction. This means costs can quickly add up when you’re processing large payments. But Modulr’s Payment Initiation operates on a fixed-fee basis. This can lead to significant savings for merchants that process high-value transactions. For example, a merchant could save £1-2 per £500 payment by using Payment Initiation instead of cards.

Less money lost to fraud through greater security features

Payment Initiation can help reduce the likelihood of fraud, as it requires customers to verify each transaction through their bank (often using two-factor authentication). When you add Modulr’s Confirmation of Payee to your payment flow, you can give customers another layer of protection by having them verify their recipient’s account details before proceeding with payment. This helps ensure their money is going to the right account.

Easy refund processing

Sending a refund to a customer is easy – you can use Modulr's API to send a payment back to the customer's account in real-time. This can improve ongoing relationships with customers, building loyalty and trust.

Reduced risk of chargebacks

When a customer requests a card payment refund through their bank, you may have to return the money and pay a chargeback fee. But with Payment Initiation there’s no chargeback process. This means you can protect yourself from customers committing chargeback fraud.

Enhanced customer experience

With Payment Initiation, customers don’t have to manually enter their payment card details or their sort code and account number. This intuitive payment experience can help build customer loyalty and reduce cart abandonment. It’s the customer experience (CX) of the future, and companies that offer it first could have a competitive advantage.

Who is Modulr’s Payment Initiation Service best for?

Modulr’s Payment Initiation Service will be an attractive alternative for any business that accepts online payments from their customers via card or bank transfer. Here are a few types of businesses that could benefit from Modulr’s PIS:

  • E-commerce and marketplaces. Merchants that sell large volumes of products online could cut costs significantly by using Payment Initiation thanks to its flat fee model. And you can ship goods with confidence because funds transfer immediately to your account, without risk of fraudulent customer chargebacks.

  • Property services. Tenants often pay rent by bank transfer, but this means they might enter the wrong amount or account number. With Payment Initiation, tenants can receive a link with the destination and prepopulated amount, so there’s no chance of error.

  • Banking and payment services. If you’re a neobank or offer financial services where you let customers top up their accounts with payment cards, you can incur significant fees. But topping up via bank transfers can be a cumbersome experience for your customers. Modulr’s Payment Initiation is a cost-effective alternative that provides a better customer experience.

  • Lending. Lenders can take advantage of Payment Initiation to collect overdue repayments. Instead, with Modulr’s PIS, you can send borrowers a link with pre-populated details for a fast, user-friendly experience.

And the benefits reach beyond these sectors. You can embed this payment solution in your system in a variety of ways. For example, you can let customers access Payment Initiation from your own payment page or a Modulr-hosted payment page. Send customers a link to initiate payments via SMS, email invoice or even through a QR code used at the point of sale. Modulr offers plenty of opportunities for payments innovation based on your business requirements.

Collect instant bank payments with Modulr’s Payment Initiation Service

For customers and business alike, Payment Initiation could become the new normal. Modulr’s Payment Initiation connects to major UK banks, with European banks in the works.

To hear how your business can benefit from Payment Initiation, speak to one of our specialists today. Request a payment strategy review.