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The practice of sharing financial information electronically, securely and immediately is referred to as Open Banking. This concept originated in the United Kingdom (UK) in 2016. By using open APIs (Application Programming Interfaces), consumers can easily share their banking data with other financial institutions, including fintech companies.

The European Union (EU) implemented a regulation known as PSD2 (Payment Services Directive 2) in 2018. Open APIs mandate that banks provide TPPs with access to both customer data and payment infrastructure. This regulation targets enhancing competition in the financial industry as well as expanding consumer choice and improving service quality.

Open Banking is closely associated with PSD2 in the UK. It relies on the identical principles of open access to customer data and payment infrastructure. Open Banking was introduced by the UK government in January 2018, which mandated that the nine largest UK banks must offer open APIs for third-party providers. Accessing customer data like account balances and transaction history is made possible for fintech companies and other third-party providers through these APIs when they have been granted permission by the customer.

Open Banking APIs serve different purposes in the UK.

Accessing account information like balances and transaction history is possible for TPPs through these APIs. They give access to budgeting apps, financial management tools, and account aggregation services among their offerings.

Initiating payments on behalf of customers is made possible by these APIs for TPPs who offer services including instant payments, peer-to-peer transfers and e-commerce transactions.

These APIs enable TPPs to check if there are enough funds in the customer’s account before they initiate a payment.

To allow TPPs to conduct controlled testing of their applications and services against open banking APIs, regulatory bodies or financial institutions supply Open Banking PSD2 sandboxes as test environments. These testing environments enable TPPs to try out their products and services without taking any risks on actual financial transactions. By enabling TPPs to test and enhance their products, sandboxes for Open Banking PSD2 aid in encouraging innovation and competitiveness in the financial sector. This is completed prior to their market launch.

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