What is Open Banking?

How Open Banking Works

Open banking was introduced in the UK in January 2018, driven by the Competition and Markets Authority (CMA) and the revised Payment Services Directive (PSD2) in Europe. It requires the nine largest UK banks — known as the CMA9 — to share customer account data with authorised third parties through secure Application Programming Interfaces (APIs), but only when the customer gives explicit consent.

In practical terms, open banking enables two key capabilities:

• Account Information Services (AIS) — Authorised providers can read account data such as balances and transaction history, with the account holder's permission. This is commonly used in budgeting apps and financial dashboards.
• Payment Initiation Services (PIS) — Authorised providers can initiate a payment directly from a customer's bank account, again with explicit consent. This enables bank-to-bank payments that bypass card networks entirely.

Open Banking Payments vs Card Payments

Traditional card payments involve multiple intermediaries: the card network (Visa, Mastercard), the acquiring bank, and the issuing bank. Each adds processing time and fees. Open banking payments are simpler:

• Lower cost — No interchange fees, scheme fees, or acquiring fees. Bank-to-bank transfers are significantly cheaper to process.
• Faster settlement — Funds typically arrive in the merchant's account the same day, or even within seconds via the Faster Payments network, compared to 1-3 business days for card transactions.
• No chargebacks — Because the customer actively authorises the payment through their banking app, open banking payments are not subject to the chargeback process that applies to card transactions.
• Strong authentication built in — The customer authenticates the payment using their banking app's security (biometrics, PIN, or password), providing strong customer authentication by default.

How Open Banking Payments Work in Practice

When a customer chooses to pay via open banking, the process typically follows these steps:

• The customer selects "pay by bank" at the checkout or is sent a payment request.
• They choose their bank from a list of supported institutions.
• They are redirected to their banking app or online banking portal.
• They review the payment details and authorise the transaction.
• The payment is initiated directly from their bank account to the merchant's account.
• Both parties receive confirmation that the payment has been completed.

Regulation and Security

Open banking in the UK is regulated by the Financial Conduct Authority (FCA). Only firms that are authorised or registered with the FCA as Account Information Service Providers (AISPs) or Payment Initiation Service Providers (PISPs) can access bank data or initiate payments. This ensures that customer data is only shared with trusted, regulated entities.

All open banking connections use strong encryption and the customer must give explicit consent for each access or payment. Customers can revoke consent at any time through their bank.