Open banking is a term used to describe the shifting financial industry together with its evolving model. It enables consumers to provide permissions to open banking Third Party Providers (TPPs) to access their banking information within banks infrastructure. TPPs can perform transactions and initiate other services on consumers behalf which fastens the process and eases customer journey.
Open banking was introduced by the Competition and Markets Authority (CMA) with the purpose to expand competition for legacy banks and develop innovative solutions to modern financial requirements. Open banking regulations are in place to make banks cooperate with TPPs and allow them to access consumers data if the consumer requires it.
In the regular financial environment, banks connect to their customers. No middle man or guidance from the side to provide and execute their services. If a customer demands something they go straight to the bank and request it. These requests could be done online or in any of the bank's branches. When digital banking became a norm, it still required a lot of manual work from a consumer who owned more than one account in several banking institutions.
Here open banking TPPs came to the rescue. TPP open banking meaning is the being of an intermediary to aid bank users in better interacting with their bank. They provide an interface designed to match the consumer necessities and access their financial data efficiently. TPP can aggregate financial data from all consumer accounts and display it in one interface, or even initiate payments on the user's behalf. TPP cannot perform any of the aforementioned actions if the consumer did not issue the authorisation or consent beforehand.
In other words, open banking third party providers are licensed and registered digital service providers that act as a middleman in the banking industry. There are two main types of TPPs - Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP).
A PISP can initiate a payment service without needing to use a card or going to log into a personal or corporate bank account. However, the Strong Customer Authentication (SCA) still applies to ensure security.
An AISP is a digital service provider that aggregates your financial information from all banking institutions and portrays it in one place. It has no access to consumers funds, however, all the transactional data is accessible. AISPs can be used for better financial management purposes or to ease loan application processes. Precisely like with PISP a consumer must give consent before a TPP can move forward with the requested information gathering.
TPP in open banking plays a very important role which empowers the whole industry to innovate faster and develop new solutions at a lower initial cost. The TPPs set their foot in the financial market when the world started turning to the online world. They have developed new services to create a comfortable consumer journey and reduce manual work by introducing automatisation processes. However, at the very beginning, it was hard for new entrants to blend into the banking industry due to extremely high requirements and regulations. Even though the TPPs were not regulated and had gaps in the legislation it was still hard to attract customers and operate efficiently.
It all changed when the European Union recognised the benefits of open banking and decided to encourage competition in an otherwise monopoly-like market. The Revised Payment Services Directive (PSD2) came out and forced legacy banks to share their data with TPPs. From then on, TPPs could enter the market a lot easier and, therefore, the competition grew.
Now open banking TPP’s can access legacy banks infrastructure via Application Programming Interfaces (APIs) and provide their services without ever gaining a banking license or setting up their technological infrastructure that would be compliant with all the regulations.
Nevertheless, open banking TPP registration is mandatory and before it can provide any services it has to be registered and acquire a license that meets the type of a TPP - PISP or AISP. Sometimes a TPP can choose to acquire a license for both categories, though mostly they are a provider of one type of service. There is an official open banking TPP list where you can find all the authorised TPPs in open banking.
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