The two types of Open Banking providers: here’s what you need to know

Since January 2018, Open Banking has been driving dramatic change across the financial world, revolutionising everything from payment solutions and budgeting tools to lending applications and credit evaluations.

But what exactly do companies offering Open Banking do? Regulated providers build and maintain the digital pipes that allow data and payments to be securely requested from banks. Companies can provide two core services available through Open Banking through two distinct FCA authorisations:

1. Account Information Service Provider (AISP): authorised to retrieve account data provided by banks and financial institutions

2. Payment Initiation Service Provider (PISP): authorised to initiate payments into or out of a user’s account

To become regulated as an AISP or PISP, companies must undergo a rigorous application process with the FCA. Some Open Banking providers can become regulated to be both and AISP and a PISP, but many only hold one authorisation.

AISPs and PISPs handle customer consents needed to access Open Banking data. This means each AISP and PISP clearly explains to the end user what data will be accessed, for how long, and who it will be shared with. This digital consent journey also forms the basis of data processing for AISPs and PISPs under GDPR.

Account Information Service Providers (AISPs) explained:

An AISP is a company authorised to access an individual or SME's account data from their financial institutions with their explicit consent. The UK’s nine largest banks are required by law to comply with these requests from the AISPs. Open Banking's framework and technical specifications enables years of transaction history to be retrieved in seconds.

Examples of AISP applications include:

• Money management tools: some AISPs collect financial information and digest it in a way that makes it easy for people to understand their financial situation, create a budget, and monitor spending. These new personal finance tools bring together data from multiple bank accounts so a user can see all of their spending in one place.
• Loan applications: Some AISPs, including Credit Kudos, use this same capability to enable customers to quickly and securely share financial information with a lender or broker. Lenders also use derived data and metrics from account information to enhance credit and afforability decisions. This process speeds up traditional underwriting and eliminates the need for lenders to manually compile and verify bank statements. Lenders benefit from better insights, while borrowers benefit from streamlined applications.

Payment Initiation Service Providers (PISPs) explained

Rather than only viewing data on an account, PISPs are authorised to make payments on behalf of a customer. PISPs do this by initiating transfers directly to or from the payer’s bank account using the bank’s own tools. This has led some industry commentors to refer to AISPs as having 'read-only' access to an individual's accounts, whereas PISPs have 'read-write' access. 

Examples of PISP applications include:

• Financial management tools: Some new money management and savings apps transfer a small proportion of someone’s balance each week to a savings account under a previously agreed process. Open Banking has also enabled new tools that automatically transfer a customer’s money between accounts on their behalf to avoid overdraft fees.
• Business solutions: New tools integrate with business’ back-office systems to allow companies to securely manage payments and collections, make real-time bank transfers, and have greater payment visibility.

How to get the most out of it

Individuals, lenders, and financial institutions are currently using Open Banking to replace previously manual and increasingly complex processes. The ability to instantly collect and view insights derived directly from bank transaction data is incredibly powerful, but can be overwhelming for businesses who haven’t had any exposure to this data before. Understanding how the technology works and what innovative companies are doing with it can make it easier to think of new applications for it. A glossary of Open Banking acronyms and definitions probably wouldn't hurt either.