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• June 3, 2022

What is Open Banking and what is it good for?

Definition of OpenBanking

According to Investopedia “Open Banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).”.

Open Banking was the precursor to PSD2 (see our article on PSD2) and was introduced in the UK in 2017. The practice was designed to help standardize payment directives and create a more efficient and secure financial ecosystem, disrupting the payments industry, affecting everything from the way we pay online, to what information we see when we make a payment. It also included directives that allow third parties to retrieve account information on behalf of an account owner.

One of the most important implications is the way that the payments are processed. The need for an intermediary channel such as Visa, Maestro or Amex is eliminated, and the merchant can initiate the payment directly with the bank on behalf of the customer.

The impact of adding the AISP service

The other major impact is the addition of the AISP service or Account Information Service Provider. This is particularly useful for aggregators and third parties who require access to the customer’s account data, such as tax offices or other entities that may request information (partial or complete) about the accounts on behalf of a particular customer.

Note that access control and management of such authorizations will always be on the side of the customer and the bank, which can revoke such access if necessary. Registration and maintenance of the status of such Trusted Payment Parties is regulated at national level.

In summary, Open Banking is a standard that is very similar to the PSD2 standard. It was created prior to and in parallel with the PSD2 standard and is now used in countries such as the UK, Switzerland, and Israel, all having very slight adjustments to fit their own legal and financial frameworks. The standards are maintained by national authorities and adjusted as needed. It is increasingly gaining a foothold in the world.

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