Open Banking is a financial services term as part of financial technology that refers to the use of APIs that enable third-party developers to build applications and services which can be used by customers around the financial institution. The APIs are secured by PSD2 regulations.
With Open Banking, customers can make payments directly from their bank accounts. Customer experience is close to bank link payments when making Open Banking payments. Open banking provides a better customer experience by enabling them to stay in the merchant’s webpage throughout the payment flow.
Payment Services Directive 2 (PSD2)
As part of the Open Banking initiative, the European Union has composed a new directive called Payment Services Directive 2 (PSD2). The directive specifies a list of financial services aimed for account holders and account providers, most notably Account Information Service (AIS) and Payment Initiation Service (PIS).
An important part of the PSD2 directive is making sure transactions are done securely. To achieve this, financial institutions are required to leverage Strong Customer Authentication (SCA). Besides, the directive specifies that third parties requesting access to account holder data via APIs are required to capture explicit consent from the account holder.