In the European Union, responsibility for supervision and also for registering and authorizing open banking service providers rests with each member country, through their National Competent Authorities (NCAs), They publish registers that will be used by Qualified Trust Service Providers (QTSPs) to make decisions on issuing certificates, and by financial institutions to check whether other parties are authorised.
Open banking regulation in UK
In the U.K., regulations issued by the Financial Conduct Authority (FCA) already require the major commercial banks to cooperate with authorized TPPs. At the moment, only the UK’s nine largest banks and building societies are required to make data available through open banking. About 50 other smaller banks and building societies have chosen to take part in open banking regulation.
The FCA regulations specify two types of service providers:
- Account Information Services Provider (AISP) lets the account holder see all the account information from different bank accounts in one place online or in a mobile app. AISPs can include budgeting apps and price comparison websites offering budgeting help and product recommendations.
- Payment Initiation Service Provider (PISP) lets account holders pay companies directly from their bank account rather than using a third-party debit or credit card such as Visa or MasterCard.
Both PISPs and AISPs need explicit consent to provide these services.
Open banking market size and open banking statistics
As of January 2020, there were 202 regulated providers in Europe who are engaged in open banking B2B, including about 60 in the UK alone. They provide financial apps that help manage finances and also consumer credit firms who use open banking to access account information for affordability checks and verification.
Open banking examples
In 2018, Banco Bilbao Vizcaya Argentaria launched its BaaS platform, Open Platform, in the USA. Open Platform utilizes APIs that allow third parties to offer customers financial products without needing to provide a full suite of banking services.
HSBC launched its Connected Money app in May 2018 in response to the UK’s open banking regulations in their attempt to place more control of financial data into the hands of consumers.
Connected Money allows customers to view various bank accounts as well as loans, mortgages, and credit cards, all in one place.
Barclays claims to be the first UK bank to enable account aggregation inside its mobile banking app. Its open banking feature even allows customers to view their account with other banks within Barclays’ mobile app.
PayPal and Valyuz are both products that exemplify how open banking serves the demands of modern banking.
What is an open banking API?
An API is a way for two computer applications to talk to each other over a network, using a common language they both understand. Open banking allows third parties to develop better personal finance management applications, by means of a banking API. An API is a set of codes and protocols that determine how different software components should interact – they essentially allow different computer applications to communicate with one another.
How do APIs work in banking?
APIs are essential to open banking services.
APIs are used to connect banking systems through payment networks as well as to display customers’ information on a bank’s website and via mobile apps. Through open banking, APIs are now being used to issue commands to third party providers.
APIs are also necessary for the functionality of Banking-as-a-Service (BaaS) – a key component of open banking. BaaS is an end-to-end process that connects fintechs and other third parties to banks’ systems directly through the use of APIs. It helps to build up banks’ offerings on top of financial providers’ regulated infrastructure.
What is open banking, and what relationship does it have to PSD2? What are the most important services and requirements introduced by PSD2? What are the various Third-Party Provider (TTP) categories? What modifications are under consideration for the revision of the PSD2 directive? What relationship does open banking have to the API economy? What are the benefits and disadvantages of open banking?
Open banking is a banking practice that grants third-party financial service providers (TTPs) access to bank account information via an application programming interface (API) provided by the bank. The Open Banking PSD2 directive was adopted by the European Parliament in October 2015 as a revision of the Payment Services Directive. The new rules were designed to encourage the development of innovative online payment methods through open banking.
The following are the primary services and obligations introduced by PSD2:
Strong Customer Authentication (ACS) Payment Initiation Service (PIS) Confirmation of the Availability of Funds (COF) Account Information Service (AIS) Third-Party Providers (TTPs), also known as PISPs, AISPs, and PIISPs.
The various types of TTPs are as follows:
- Payment Initiation Service Provider (PISP)
- Account Information Service Provider (AISP)
- Payment Instrument Issuer Service Provider (PIISP)
Changes being discussed in the revision of the PSD2 directive include obligations and rights deriving from the directive, procedures for customer authentication through the methodologies provided by the SCA, definitions and application fields of the directive, transparency of information conditions and requirements, payment institution license and payment service provider compliance, methods of access to payment systems, and how to access accounts held in a specific financial institution.
Open banking is a component of the API economy, which is an economic trend based on the use of APIs to create services and products using data, interfaces, and functionalities developed by other providers. New payment methods and banking products, assistance in managing one’s finances, and the ability to use non-banking services are among the benefits of open banking (such as insurance). However, there are a number of risks associated with open banking, such as the possibility of attacks by malicious individuals or hackers and privacy issues that may arise.
SEPA API Access Scheme
The Single Euro Payments Area (SEPA) is an EU initiative to harmonize euro payments within the EU and associated countries. SEPA aims to improve payment systems to boost economic growth and integration. The European Payment Council (EPC) created the SEPA API Access Scheme to encourage payment industry innovation and competition by allowing third-party providers to access payment accounts via APIs.
The SEPA API Access Scheme sets technical and operational standards for third-party providers to access payment accounts via APIs. The open, fair, and secure scheme promotes payment industry innovation, competition, and consumer protection. Third-party providers need a license from their national regulatory authority to access payment accounts via APIs under the SEPA API Access Scheme. The license requires the provider to meet operational and technical standards, including customer data security.
Banks and other payment service providers must also provide API access to payment accounts. Third-party providers can access payment account information and initiate payment transactions on behalf of customers without logging into their bank accounts. This streamlines consumer payments.
SEPA API Access Scheme benefits:
SEPA API Access Scheme benefits consumers, third-party providers, and payment service providers. The scheme encourages payment industry innovation and competition, which benefits consumers with better products and lower prices. Third-party providers allow consumers to make payments without logging into their bank accounts, making the payment process easier. The scheme gives third-party providers a new way to sell payment products and services to consumers. This increases payment industry innovation and consumer choice. Third-party providers can access payment account information and initiate payments on behalf of customers, simplifying and lowering costs.
The scheme encourages payment service providers to innovate and compete, resulting in better products and lower prices. API access to payment accounts increases visibility and availability for payment service providers.
SEPA API Access Scheme rules and standards promote payment industry innovation, competition, and consumer protection. APIs allow third-party providers to access payment accounts, simplifying the payment process and improving consumer convenience. The scheme encourages payment industry innovation and competition, which improves products and services at lower prices. The SEPA API Access Scheme is good for consumers, third-party providers, and payment service providers.