Open Banking

Open banking encompasses two distinct services: Account Information Services (AIS) — read-only access to account data — and Payment Initiation Services (PIS) — the ability to push payments from a consumer’s bank account to a merchant. The payment initiation use case is the commercially significant one for merchants.

How Open Banking Payment Initiation Works

A PISP (Payment Initiation Service Provider) payment flow:

1. Consumer selects “Pay by Bank” at checkout
2. Consumer is redirected to their bank’s consent screen
3. Consumer authenticates (biometric or OTP) and approves the payment
4. PISP initiates the payment via the bank’s open banking API
5. Payment settles via the domestic real-time rail (Faster Payments in UK, SEPA Instant in EU)
6. Consumer is redirected back to the merchant with confirmation

The settlement is account-to-account — no card network, no interchange, no chargeback liability for the merchant (though also no chargeback rights for the consumer without explicit PISP dispute processes).

Where Open Banking Payments Work

Working well: UK utility and bill payments, government tax payments, gambling top-ups (where card restrictions apply), B2B invoices above £1,000 where MDR savings are material, subscriptions via Variable Recurring Payments (VRP).

Not working well: General e-commerce checkout. The redirect flow (2 redirects, 4–6 steps, 30–60 seconds) is structurally longer than a stored-card checkout. Conversion impact is real and limits adoption in competitive checkout environments.

Regulatory Framework by Market

• UK: FCA-regulated under Payment Services Regulations 2017. Open Banking Limited (OBL) sets implementation standards. ~£1.5B monthly PISP transaction volume as of 2025.
• EU: PSD2 mandated bank APIs; quality has been inconsistent. PSD3 (2026–2027 transposition) adds uptime SLAs and VRP-equivalent mechanisms.
• Australia: Consumer Data Right (CDR) + PayTo (NPP mandate framework) providing open banking + payment initiation infrastructure.

Variable Recurring Payments (VRP)

VRP is the open banking mechanism for recurring payments — a consumer-authorised mandate allowing a merchant to pull variable amounts from their bank account within set limits. When third-party VRP reaches full UK bank support (expected 2026–2027), it becomes a direct competitor to card-on-file subscription billing with near-zero MDR and no card expiry risk.