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Open Banking is a financial services term used to describe the practice of sharing financial information electronically, securely, and in real-time. It is a concept that emerged in the United Kingdom (UK) in 2016, which allows consumers to share their banking data with other financial institutions, such as fintech companies, using open APIs (Application Programming Interfaces).
PSD2 (Payment Services Directive 2) is a regulation that came into effect in the European Union (EU) in 2018. It requires banks to provide third-party providers (TPPs) with access to customer data and payment infrastructure through open APIs. This regulation aims to increase competition in the financial sector and provide consumers with more choices and better services.
In the UK, Open Banking is closely related to PSD2, as it is based on the same principles of open access to customer data and payment infrastructure. The UK government introduced Open Banking in January 2018, requiring the nine largest banks in the UK to provide open APIs for third-party providers. These APIs allow fintech companies and other third-party providers to access customer data, such as account balances and transaction history, with the customer’s consent.
Open Banking APIs in the UK are used for various purposes, including:
Account Information Services: These APIs allow TPPs to access account information, such as balances and transaction history, to provide services such as budgeting apps, financial management tools, and account aggregation services.
Payment Initiation Services: These APIs allow TPPs to initiate payments on behalf of customers, enabling services such as instant payments, peer-to-peer transfers, and e-commerce transactions.
Confirmation of Funds Services: These APIs allow TPPs to check whether a customer has sufficient funds in their account before initiating a payment.
Open Banking PSD2 sandboxes are test environments provided by regulatory bodies or financial institutions to enable TPPs to test their applications and services against open banking APIs in a controlled environment. These sandboxes allow TPPs to test their products and services without risking any real-world financial transactions. Open Banking PSD2 sandboxes help to promote innovation and competition in the financial sector by allowing TPPs to test and refine their products before they are launched to the market.
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