What is Open Banking?
A look at how open banking is transforming fintech in the EU & UK
This topic contains a lot of acronyms. We’ve taken care to define these the first time they’re used.
Open banking is based on the idea that open, consensual access to consumers’ bank account data benefits them and supports competition in the market. Traditionally, banks have been data silos lacking an incentive to let other companies access their customers’ information. But now regulators across the world are working to free up access to this data for the sake of competition and innovation.
Instant third-party access to customer bank account data supports the development of new services and thriving fintech ecosystems. From a consumer perspective this means easy access to a range of new and improved financial services, from budgeting apps to loans.
Application Programming Interfaces (APIs) are the technology at the heart of open banking. If Banks provide standardised APIs to share customer account data, they make it possible for Third Party Providers (TPPs) to offer products and services based on direct access to that data.
The EU’s PSD2 legislation has given open banking momentum in Europe — it’s the foundation for simple and secure data sharing between banks, consumers and third parties.
Our focus here is on the EU and particularly the UK — but open banking regimes have emerged in other countries and territories.
The global development of open banking regulations and initiatives
How does PSD2 enable open banking?
Payment Services Directive 2 came into force in September 2019, designed to create a Digital Single Market for payments in the EU. The directive focuses on making payments safer for consumers and promoting competition and innovation in financial services. This is achieved by improving security standards for payments and requiring banks to provide APIs for Third Party Providers (TPPs), making it easier for new fintech companies to provide their services securely. The directive applies to bank accounts held by people in each of the EU’s member states and the UK.
PSD2 created two new kinds of company; Payment Information Service Providers (PISPs) and Account Information Service Providers (AISPs). Both are based around direct access to consumer bank accounts, with their consent. AISPs can access account data like account holder information and transaction history, useful for budgeting apps, credit assessments, and proof of identity. PISPs can initiate bank-transfer payments directly from the payer’s account, with their authority. These payments settle instantly, incurring no interchange fees or card infrastructure charges.
TPPs can be licensed as either a PISP, AISP or both. Once regulated by the appropriate authority, they can connect their applications to the banks’ APIs. This will usually involve collaboration with their national or regional implementation organisation. In the UK this is the aptly named Open Banking Implementation Entity (OBIE), which ensures that the banks’ APIs are stable and consistent.
A note on PSD2 API readiness in Europe
Not all banks were ready with fully usable APIs when PSD2 came into force last year. This is still the reality at the time of writing (May 2020) — although the situation is improving. In many cases, there has been no certainty that an API is usable until third parties attempt to integrate with it.
API usability varies between countries and often between individual banks. From our experience, account information APIs have good general availability but payment API readiness is more varied.
Because of this, PSD2-based services operating in certain EU countries may only have partial coverage of those countries’ banks. Service providers can offer their products in more territories as APIs are finalised and refined.
Ultimately, banks in the EU & UK are required by law to provide working PSD2 APIs. TPPs’ efforts to integrate with bank APIs and the support of implementation organisations are driving the finalisation and stabilisation of the remaining APIs.
What’s next for open banking in Europe?
As PSD2 APIs become usable across Europe, the potential for new fintech services offered across national boundaries increases. PSD2 is the foundation for intra-European payment and account information services. Lower payment fees, consensual access to consumer account data and EU-wide standardisation will open and connect financial services at an unprecedented scale.
Open banking doesn’t end with easier access to account information and account-to-account payments. In the UK, the capabilities of open banking are being expanded to support a number of new features.
Upcoming features: trusted beneficiaries, reverse payments & variable recurring payments
A number of upcoming features add to the adaptability of the initiative, particularly expansions to the payment capabilities of PISPs. These include trusted beneficiaries, reverse payments and variable recurring payments.
Trusted beneficiaries are another piece of the open banking puzzle. This is the option for customers to ‘whitelist’ businesses that they trust — removing some of the friction from making payments to them.
Reverse payments are self-descriptive. This function lets companies pay money into their customer’s account, suitable for use cases including refunds, and withdrawals of funds.
Variable Recurring Payments let a business initiate payments from customer accounts, without the need for the customer to authenticate. These payments do not have to be of fixed amounts, making them particularly useful for subscription services and utility payments.
The final section offers a quick overview of the Citizen platform, as an example of how the features of open banking translate into a product offering.
The Citizen Platform: open banking made easy
Citizen is a payments and account verification platform based on PSD2 and open banking. Our focus is on developing a product that’s easy to integrate and operate, with an excellent end-customer experience.
Citizen lets you offer customer-ready account-to-account payments, that settle instantly with instant confirmation of funds. We’ve tested and improved our payment flows extensively, making sure they’re as quick, clear and intuitive as possible.
Account verification makes it easier to onboard new customers as well as pay refunds and withdrawals to customers. Verifying customer accounts via open banking removes the need for them to submit paper statements, make microtransactions or use authentication codes. Customers approve verification requests directly in-app, a more secure process that leaves no room for fraudulent submissions.
Accept cardless payments and verify customer identities using Citizen
Citizen is omni-channel and can be adapted to any payment or verification flows. Visual components of the Citizen platform can be customised to match your brand and style. We make this easy with a specially designed user interface.
We’ve made Citizen as easy as possible to access and use. Integrating typically takes less than a day of development time, there are no setup fees, and we provide remote support throughout the process. Citizen features an intuitive dashboard for viewing and managing payments and account verification actions.
We’ll continue to incorporate upcoming Open Banking features into our platform where they complement our product.
You can learn more about Citizen on our website, www.citizen.is.