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When discussing open banking, you’ll have likely heard reference to PSD2, but might not be sure what it is. In this guide, we’re going to explore what open banking and PSD2 are, as well as how they relate to making and receiving payments. 

What is open banking? 

Open banking is a system that allows banks and authorised third parties to share payment information seamlessly, using application programming interfaces (APIs) to connect different systems together. This cross-platform collaboration helps to encourage innovation and competition within the payments market, and gives smaller brands and non-banks access to powerful tools to help their businesses grow. 

For consumers, open banking unlocks a wide variety of convenient financial tools and services, giving them more control over their finances. Account holders must give prior consent for third parties to share data or initiate payments on their behalf, and can withdraw consent at any time. Examples of open banking include allowing users to view all of their bank accounts and bills in one place, powering price comparison websites, and automating instant loan approvals. 

You can learn more in our comprehensive guide to open banking payments. 

What is PSD2? 

The Revised Payment Services Directive (PSD2) is a piece of legislation governing security standards for online transactions. It’s an updated version of the Payment Services Directive and applies throughout the European Union (EU) and European Economic Area (EEA). By regulating open banking, PSD2 aims to improve security and fraud prevention, while also encouraging innovation and competition in the finance industry. 

Key aspects of PSD2 include the right for consumers to use a third-party to provide online banking services, which requires banks to provide open APIs, and strict security requirements, such as Strong Customer Authentication (SCA), to protect data and minimise fraud. 

What are the differences between open banking and PSD2? 

While they are related, there are key differences between open banking and PSD2. Here’s a quick overview. 

Open banking is the practice of banks and financial institutions opening up their data and APIs to third-party developers. It’s primarily focused on data sharing and driving innovation in financial services, helping to enhance competition and increase consumer choice. 

PSD2 is an EU regulation aimed at improving and standardising payment services and their providers throughout the EU and EEA. It includes provisions that facilitate open banking, but also covers a broader range of topics such as payment security, consumer protection, and standardisation of payment services. 

How does open banking work? 

Here’s a deeper look into the technological infrastructure required for open banking and PSD2 implementation. 


Open banking fundamentally relies on the concept of APIs (Application Programming Interfaces), which serve as the bridge for communication and data exchange between different financial institutions, third-party providers and consumers. These APIs allow the sharing of account information, transaction history, payment initiation and more between authorised parties, and ensure seamless cross-platform and seamless integration. 

Authentication protocols 

PSD2 mandates the use of Strong customer authentication (SCA) to enhance the security of electronic payments and customer account access. SCA typically involves the use of multiple factors for authentication, such as something the user knows (e.g. password), something the user has (e.g. mobile device), and something the user is (e.g. fingerprint scan). 

Data security 

Data security is paramount in open banking systems to protect sensitive financial information from unauthorised access, manipulation, and breaches. Open banking uses robust authentication mechanisms, such as OAuth 2.0 and OpenID Connect to verify the identity of users and authorise access, as well as encryption using Transport Layer Security (TLS) or AES (Advanced Encryption Standard) to secure data in transit and at rest. 

Benefits of open banking and PSD2 

Open banking and PSD2 work together to provide a wide variety of benefits for consumers, businesses, and the overall financial industry. 

Financial innovation 

Open banking and PSD2 foster financial innovation by enabling the development of new products and services tailored to consumers’ needs and preferences. This includes innovative payment solutions, personalised financial advice, and advanced budgeting tools. 

Industry standardisation 

Both initiatives promote the standardisation of APIs and data formats, which enhances cross-platform support among financial institutions and third-party providers. This standardisation streamlines integration processes and facilitates the seamless exchange of data, ultimately benefiting both businesses and consumers. 

Access to more financial services 

Open banking and PSD2 give consumers access to a wider range of financial services beyond traditional banking offerings. Consumers can easily connect their accounts to third-party apps and services, unlocking innovative solutions such as automated savings, investment platforms, and loan comparison tools. 

Improved customer experience 

By empowering consumers with greater control over their financial data, open banking and PSD2 facilitate the creation of personalised and streamlined financial experiences. This enhanced convenience, efficiency and satisfaction boosts customer uptake and retention for providers of financial products and services. 

Key considerations of open banking and PSD2 

While they help to unlock access to innovative financial services, there are many important considerations to bear in mind when discussing the implementation of open banking and PSD2. 

Data privacy 

One of the primary concerns associated with open banking and PSD2 is the protection of consumer data. As financial data is shared between multiple parties, there’s an increased risk of data breaches and unauthorised access. It’s crucial to implement robust data privacy measures and encryption protocols as outlined in regulations such as PSD2 to safeguard sensitive information. 

Regulatory framework 

Open banking operates within a complex regulatory framework that requires compliance with various data protection and security standards, such as PSD2. Financial institutions and third-party providers must navigate these regulations to ensure data privacy, security and regulatory compliance. 

Implementation costs 

The implementation of open banking and PSD2 requires significant investments in technology infrastructure, API development, and compliance processes. Following implementation, financial institutions and third-party providers must also allocate resources for the ongoing maintenance of systems. 

Consumer education 

Another important consideration is the need to educate consumers about the benefits, risks and implications of open banking and PSD2. Many consumers may be unfamiliar with these initiatives and could be wary of the concept of sharing financial data with third parties. It’s essential to provide clear and transparent information to empower consumers to make informed decisions about their financial data sharing practices. 

The future of open banking and PSD2 

By allowing banks, third-party providers and consumers to collaborate, open banking unlocks almost endless innovation that will continue to transform the payments landscape. With support from emerging technologies like AI, the potential for revolutionising digital transactions is vast. 

However, ensuring safety is crucial, requiring strict regulation and ongoing auditing to protect user security. As open banking continues to evolve, regulations such as PSD2 must adapt to govern new tech and meet changing consumer expectations. By prioritising innovation, collaboration and consumer-centric solutions, the financial industry can maximise the benefits of open banking payments for sustainable growth in the digital era. 

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