The advent of Open Banking has impacted the financial world significantly, revolutionizing everything from payment solutions and budgeting to lending applications and credit scores.
But what does Open Banking exactly entail? Regulated providers build and maintain digital pipes that allow banks to securely handle data and payments. Companies that provide two core services available through Open Banking receive two different FCA authorizations:
- Account Information Service Provider (AISP): Authorized to retrieve bank and financial institution account information
- Payment Initiation Service Provider (PISP): Authorized to initiate payments from or into a user’s account.
Companies must undergo a rigorous application process with the FCA to become an AISP or PISP. Open banking service providers can either become AISPs or PISPs, but most hold a single authorization.
Assuring the consent of customers who wish to know their Open Banking data is the responsibility of AISPs and PISPs. Essentially, each AISP and PISP discloses to the end-user what information would be accessed, for how long, and who would be able to have access to it. In addition to digital consent journeys, AISPs and PISPs are required to comply with GDPR in terms of data processing.
Account Information Service Providers (AISPs) explained:
AISPs are companies that have been granted permission to access financial institution account data with the participant’s explicit consent. A month’s worth of transaction history can be retrieved in seconds, thanks to Open Banking’s framework and technical specifications.
A few AISP examples are as follows:
- Finance management tools: Some AISPs collect financial information and present it in a manner that simplifies the process of understanding, creating, and monitoring a budget. With these new tools, users can view all their spending across multiple bank accounts.
- Loan applications: This same capability is offered by a few AISPs for customers to securely engage with lenders and brokers. A lender may also use account information to determine creditworthiness and affordability. Traditional underwriting can be accelerated using this method, and lenders will no longer have to check bank statements manually. As a result, lenders have better insights, while borrowers can streamline their applications.
Payment Initiation Service Providers (PISPs) explained
An authorized PISP is not restricted to viewing account data; instead, they can make payments in the customer’s name. A bank can directly credit or debit a payer’s account by using its own tools. As a result, some industry commenters refer to AISPs as having only ‘read-only’ access to an individual’s accounts, while PISPs have both read and write access.
Examples of PISP applications include:
- Financial management tools: New money management and savings applications may automatically transfer a portion of a user’s balance each week into a savings account following previously agreed terms. Open Banking has also increased access to new tools that allow customers to avoid overdraft fees by automatically moving their money between accounts.
- Business solutions: With these new tools, companies can manage payments and collections more securely, make real-time bank transfers, and have greater visibility into payments.
How to enhance your experience
Individuals, lenders, and financial institutions are replacing previously manual and increasingly complex business processes with Open Banking. Insights about bank transactions can be drawn instantly from bank transaction data.
This is incredibly powerful but can be overwhelming for businesses who are unfamiliar with it. Innovative companies use technology to create new uses, so learning about how it works can help them discover and create new possibilities.