What Is Open Banking?

Open banking is a system in which banks are required (or encouraged) to share customer financial data and provide payment initiation capabilities to licensed third-party providers (TPPs) through secure Application Programming Interfaces (APIs). The consumer must give explicit consent for their data to be shared or for payments to be initiated on their behalf. Open banking is reshaping the payments industry by enabling new account-to-account (A2A) payment methods that bypass traditional card networks.

## How Open Banking Works

Open banking operates through two types of licensed providers defined under regulations like PSD2 (Europe) and Open Banking Standard (UK):

**Account Information Service Providers (AISPs)** can access a consumer's bank account data (with consent) to provide services like account aggregation, financial management tools, credit scoring, and affordability checks. AISPs can read data but cannot initiate transactions.

**Payment Initiation Service Providers (PISPs)** can initiate payments directly from a consumer's bank account (with consent). This enables merchants to accept bank transfers at checkout without the consumer manually logging into their online banking — the PISP handles the payment initiation through the bank's API.

The typical open banking payment flow works as follows: the consumer selects "pay by bank" at checkout, chooses their bank, is redirected to their bank's authentication screen (or confirms via their banking app), authorizes the payment, and the funds are transferred from their account to the merchant's account. The entire process takes seconds and provides instant confirmation.

## Regulatory Framework

Open banking is driven by regulation in most markets:

**Europe (PSD2)**: The Second Payment Services Directive, effective since January 2018, requires all banks in the European Economic Area to provide APIs for AISPs and PISPs. PSD2 also mandates Strong Customer Authentication (SCA) for electronic payments, requiring two-factor authentication for most transactions.

**United Kingdom**: The UK's Competition and Markets Authority (CMA) ordered the nine largest UK banks to adopt the Open Banking Standard in 2018. The UK's Open Banking Implementation Entity (OBIE) developed technical standards and a directory of regulated providers. The UK is widely regarded as the most advanced open banking market.

**Brazil**: Brazil launched its open banking framework in phases starting in 2021, requiring major banks to share customer data and provide payment initiation APIs.

**Australia**: The Consumer Data Right (CDR) enables open banking in Australia, giving consumers the right to share their banking data with accredited third parties.

**United States**: The US does not have a comprehensive open banking regulation, though the Consumer Financial Protection Bureau (CFPB) has issued rules under Section 1033 of the Dodd-Frank Act to establish data sharing requirements.

## Open Banking Payments vs Card Payments

Open banking payments offer several advantages over card payments for merchants:

- **Lower fees**: Open banking payments bypass card network interchange and scheme fees, typically costing 0.1-0.5% compared to 1.5-3% for card payments. - **No chargebacks**: Bank transfers are irrevocable — there is no chargeback mechanism, eliminating a major cost and risk for merchants. - **Instant settlement**: Many open banking payments settle in real time or same-day, compared to 1-3 business days for card settlements. - **Higher authorization rates**: Bank transfers do not suffer from the same decline rates as card payments (expired cards, insufficient funds checks happen in real time, no fraud blocks by issuers).

The primary disadvantage is consumer adoption — most consumers are still more comfortable paying by card, and the open banking checkout experience varies significantly by bank and market.

## Open Banking and Payment Orchestration

Payment orchestration platforms are increasingly incorporating open banking as a payment rail alongside cards and alternative methods. By offering "pay by bank" as a checkout option, merchants can route suitable transactions through open banking to reduce costs while maintaining card acceptance for consumers who prefer it.

Companies like Trustly, TrueLayer, Plaid, GoCardless, and Volt operate as open banking infrastructure providers, connecting merchants to thousands of banks across multiple markets. Major PSPs like Adyen and Checkout.com also offer open banking payment methods within their platforms.