Glossary

Open banking is based upon the sharing of data between banks and technical providers. It is a direct consequence of the European Union’s Payment Service Directive 2 (PSD2). Technical providers fall into two categories: account information service providers (AISPs) and payment initiation service providers (PISPs).

AISPs provide informational services, e.g. collating read-only financial information from multiple bank accounts, categorizing expenses to help users budget. PISPs facilitate payments; with customers' consent, they can initiate transfers between bank accounts. 

Providers access customers’ banking information via an application programming interface (API). This allows data to be shared securely and for transactions to be initiated by PISPs. Allowing bank transfers to be initiated by third parties opened up the market to new players, from fintech startups to established technology companies.

Open banking is a result of the revised Payment Services Directive (PSD2). European regulation requires banks to create mechanisms that allow third-party providers to access the bank’s services with the consent of their customers.

Due to the growth of online shopping and online payments, the European Union enacted legislation in to protect consumers and merchants called the Payment Services Directive (PSD). The first PSD was adopted in 2007 with the intent of increasing competition in the payments industry across Europe. It was subsequently replaced by the Revised Payment Services Directive (PSD2), which came into force in 2016. 

PSD2's key objectives were the creation of a more integrated European payments market with a level playing field for payment service providers. There was also a strong emphasis on secure payments and protecting consumers, e.g. with SCA (Strong Customer Authentication).

PSD2 also introduced open banking by requiring standardized access to payment accounts via an API (application programming interface). This opened the doors for third parties to offer services to consumers, ranging from initiating payments to account and financial management services.