Open Banking Providers: What Do They Do?

Open banking is an exciting trend that brings many benefits. But without providers, open banking wouldn’t be possible. In this article, we’ll dive into the key roles, advantages, challenges, and future outlook of open banking providers in today’s fast-changing financial world.

Key Products of an Open Banking Provider

Open banking, driven by the EU’s PSD2 regulation, mandates that banks share customer data with authorised fintech companies. In the past, banks had exclusive control over this data. Now, with strict regulations in place, customer consent is required before any information is shared.

This system uses Application Programming Interfaces (APIs) to enable secure communication between different software systems. Through these APIs, banks can safely exchange data.

Currently, there are two major product categories offered by open banking provides:

• A2A Payments

Account-to-account (A2A) payments, also called “pay-by-bank” are build on the open banking infrastructure. To offer A2A payments under PSD2, open banking providers need a Payment Initiation Service Provider (PISP) license.

With A2A payments, customers can authorise payments directly through their bank, skipping entering long payment details. The process seamlessly redirects users from their banking app to the merchant’s site.

• Data & Verification Tools

In the past, combining multiple bank accounts on one platform relied on screen scraping, which came with security risks. Open banking solves this issue with secure APIs.

In Europe, licensed Account Information Service Providers (AISPs) use APIs to gather data from different accounts and bring it together in one place. AISPs offer a range of services, from basic data collection to advanced analytics, giving businesses valuable insights and robust verification tools.

Why Choose Open Banking

Open banking is not a new trend anymore. It’s the new reality in finance. Here are some of the key reasons why businesses and consumers should choose open banking.

• Lower Costs for Merchants: Reduced fees for transactions, helping businesses save money and increase profitability.
• Faster Transactions: Quicker payments improve cash flow management, ensuring businesses have access to funds sooner.
• No Chargebacks: Eliminating the risk of chargebacks, which saves merchants from potential losses and disputes. Instead, customers follow the refund procedure.
• Customer Insights for Personalisation: Access to detailed customer data allows businesses to offer personalised experiences, enhancing customer satisfaction.
• Better User Experience (UX): Streamlined payment processes create a smoother, more enjoyable experience for customers.
• Financial Inclusion: Making financial services more accessible to a wider range of consumers, supporting underserved populations that don’t have financial history. Open banking is widely used in insurance and mortgages to veify income and include unbanked populations.

Challenges Faced by Open Banking Providers

While open banking offers many advantages, providers face several challenges. One of the biggest is ensuring data security and privacy. Since open banking involves sharing sensitive financial information, providers need strong security measures to protect this data. This means using advanced encryption, multi-factor authentication, and constantly monitoring for threats.

Another challenge is regulatory compliance. Open banking is governed by different regulations depending on the region, and providers must navigate this complex legal landscape. Staying compliant is essential to avoid legal issues and maintain consumer and financial institution trust.

Building consumer trust is also key. Many people are hesitant to share their financial data with third parties due to privacy concerns. Providers must show they are committed to safeguarding customer data and be clear about how it’s used.

How to Choose an Open Banking Provider

Choosing the right open banking provider for your business involves several important steps. Here’s what you need to consider:

1. Identify Your Needs

Start by determining what your business specifically requires. Do you need services like AISP (Account Information Service Provider) or PISP (Payment Initiation Service Provider)? Are you looking to integrate A2A (account-to-account) payments or enhance your data analytics? Also, decide on the budget you’re willing to allocate for these services.

1. Research Providers

Look for trusted sources and online reviews to gather a list of potential providers. Focus on those with a strong reputation and experience in your industry. It’s important to choose a provider with a proven track record in helping businesses like yours.

1. Test the Service

Finally, it’s a good idea to test the provider’s services before committing. Many offer demos or trial periods that allow you to assess the platform’s functionality, ease of use, and reliability. During this period, evaluate how user-friendly the system is, the speed of transactions, and any issues that arise.

Bottom Line

An open banking provider plays a pivotal role in the financial services industry, facilitating the secure sharing of data and driving innovation. While there are significant challenges, including data security, regulatory compliance, and building consumer trust, the benefits of using one of such providers are substantial.