What Is Open Banking? A Payments Product Manager’s Guide

Open banking is the regulatory and technical framework that requires banks to share customer financial data — with the customer’s consent — with third-party providers via standardised APIs. It is the foundation of a new generation of payment products, from account-to-account payments that bypass card networks to personal finance tools that aggregate data across multiple banks.

Where Open Banking Came From

The UK and EU led the way. The EU’s Revised Payment Services Directive (PSD2), enacted in 2018, required banks to open their payment infrastructure to licensed third parties. The UK’s Competition and Markets Authority mandated the nine largest banks to implement open banking APIs. The result was a surge of new payment initiation and account information services.

The US has moved more slowly — driven by market rather than regulation — but the Consumer Financial Protection Bureau’s Section 1033 rulemaking is pushing open banking into the mainstream.

How Open Banking Works

There are two core use cases that matter for payments product managers:

Payment Initiation Services (PIS) — A third party initiates a payment directly from a customer’s bank account, bypassing the card network entirely. The customer authorises the payment through their bank’s app or web interface (via redirect or embedded flow), and funds move via faster payments rails. No card, no interchange, no chargeback risk.

Account Information Services (AIS) — A third party reads a customer’s account data — balances, transactions, account details — with their consent. This powers personal finance apps, credit scoring models, income verification tools and fraud prevention systems that can see real transaction history rather than relying on self-reported data.

The Infrastructure Layer

Connecting directly to hundreds of banks via their individual APIs is impractical. Open banking aggregators — Plaid, TrueLayer, Tink (acquired by Visa), Yapily, Nordigen (acquired by GoCardless) — solve this by providing a single integration point that normalises access across multiple bank APIs.

From a product architecture perspective, you integrate once with the aggregator and gain access to their bank coverage. Coverage varies significantly by market — this is a critical evaluation criterion when choosing an aggregator.

Why Open Banking Matters for eCommerce

The headline benefit for merchants is cost. Card interchange on a typical credit card transaction runs 1.5–2.5%. Account-to-account payments via open banking rails cost a fraction of that — often a flat fee under £0.20 per transaction.

Chargebacks are also eliminated. Card disputes are a major cost centre for merchants — typically 0.5–1% of revenue for digital goods businesses. Account-to-account payments have no chargeback mechanism by design. Disputes go through the bank’s standard processes, which are far less merchant-unfriendly than card network rules.

The friction, however, is real. Redirecting a customer to their bank app to authorise a payment adds steps. Conversion rates on open banking payment flows are lower than saved-card flows for most demographics, though this gap is narrowing as bank authentication UX improves.

Open Banking and Fraud

Open banking changes the fraud landscape in both directions. Strong Customer Authentication (SCA) — required under PSD2 — means payments are inherently two-factor authenticated. This significantly reduces card-not-present fraud.

However, Authorised Push Payment (APP) fraud — where a customer is tricked into initiating a payment to a fraudster — is a growing problem specific to open banking rails. The UK’s Payment Systems Regulator mandated reimbursement requirements for APP fraud in 2024, changing the liability model for payment service providers.

Open Banking in the Context of a Payments Roadmap

For a payments PM, open banking typically enters the roadmap in one of three ways: as an alternative payment method to offer at checkout, as an account verification tool for onboarding, or as a data source for underwriting or fraud scoring.

The right entry point depends on your business model, customer base and existing infrastructure. For high-value B2B transactions where interchange cost is material, payment initiation is often the first use case. For lending or BNPL products, account information for income verification is frequently the starting point.

Related Reading

• What Is BNPL and How Does It Work?
• Payment Processing Fees — Who Makes Money and How Much
• What Is a Chargeback and How to Prevent It