Since January 2018, Open Banking has been creating dramatic changes throughout finance and has revolutionized everything from payment solutions to budgeting tools to credit applications and lending assessments.
Open Banking: AISPs and PISPs explained
What exactly do the companies that offer Open Banking do? Regulated providers construct and maintain the digital channels that permit transactions and data to be safely obtained from banks. Businesses can provide two key services via Open Banking through two distinct FCA authorizations:
1. Account Information Service Provider (AISP ): authorized to retrieve data about accounts supplied by financial institutions
2. Pay Initiation Service Provider (PISP ): authorized to make transfers into or out of the user’s account
To be licensed to be an AISP or PISP, firms must go through a strict application procedure with the FCA. Certain Open Banking providers may be regulated as both an AISP and PSP; however, many only have one authority.
AISPs and PISPs handle customers’ consent required to gain access to Open Banking records. This means that every AISP and PISP clearly informs the user how data will be accessible in what time frame, how long it will be accessed, and with whom they will share it. The digital consent process is also the basis for processing AISPs and PISPs by GDPR.
Account Information Service Providers (AISPs) explained:
The term “AISP” refers to an AISP as a business authorized to gain access to an individual’s or SME’s data on their accounts from their financial institutions, with their consent.
The nine largest banks in the UK are legally obliged to comply with the demands from AISPs. Open Banking’s structure and specifications allow the history of years of transactions to be recovered in just a few seconds.
A few examples of AISP applications are:
- Tools for managing money: some AISPs collect financial data and then process the data to allow users to comprehend their financial situation, make a budget, and track spending. The new tools for personal finance combine data from multiple accounts so that a person can track all their spending on one page.
- Loan applications Certain AISPs like Credit Kudos use this same technology to allow their customers to speedily and safely communicate financial data to brokers or lenders. The lenders also utilize the derived data and metrics derived from account information to help improve the ability to make affordability and credit decisions. This method speeds up traditional underwriting and eliminates the necessity that lenders manually prepare and check bank statements. The lenders benefit from greater insight and a better understanding of their customers, while borrowers enjoy simplified applications.
Payment Initiation Service Providers (PISPs) explained.
Instead of only looking at data about accounts, PISPs have the authority to perform payments on behalf of customers. They make this happen by initiating transfers directly from or to the payer’s account with the tools of the bank. It has led some industry experts to describe AISPs as having read-only access to the accounts of an individual; however, PISPs do have read-write access.
A few examples of PISP applications are:
- Tools for managing finances: Some new money savings and management apps can transfer a small portion of a person’s balance every week into a savings account by an earlier agreed procedure. Open Banking also provides new tools that can automatically transfer a customer’s money between accounts on behalf of the customer to reduce overdraft fees.
- Enterprise solutions new solutions integrate back-office systems for businesses to securely manage collections and payments and bank transfers in real-time and offer better visibility of payments.
How can you make the most of it?
Individuals or lenders and the financial sector are using Open Banking to replace previously manually-based processes that are becoming increasingly complicated. The ability to immediately access and analyze insights directly from banks’ transaction data is quite powerful.
Still, it can be overwhelming for companies who’ve never had exposure to this information before. Understanding how technology works and the innovative companies are using it will help you create new applications for it. The glossary for Open Banking acronyms and definitions certainly wouldn’t hurt.