If you've ever made a payment directly from your bank account to a merchant or service provider, it’s likely that a Payment Initiation Service (PIS) was part of the technology that made it happen. And as Open Banking becomes more widely used and understood, PIS will play an increasingly important role in how goods and services are paid for.
In this article, we’ll explore what Payment Initiation Services are, how they work within the context of Open Banking, and the benefits they can offer to businesses and users alike.
What is a Payment Initiation Service?
A Payment Initiation Service (PIS) is an element of Open Banking that initiates payments directly from a user’s bank account with their consent. PIS has been used since the launch of Open Banking in 2018.
PIS providers (PISPs), which are regulated by the Financial Conduct Authority (FCA), act as intermediaries between the payer and recipient’s banks. Once a user authorises the PISP to access their bank account, the provider instructs the user’s bank via an API to transfer the funds directly to the intended recipient.
Payment Initiation Services offer several advantages compared to traditional payment methods:
Direct payments: Third-party providers can initiate payments directly from a user’s bank account, without the need for intermediaries like card networks and acquirers.
Lower fees: PIS is one of the cheapest ways to initiate payments through APIs, as they bypass traditional card networks and their associated fees.
Enhanced security: PSD2 requires PIS providers to adhere to strict security standards, including strong customer authentication (SCA).
Better user experience: With PIS, users don’t need to enter their card details, log in to third-party payment platforms or share any personally identifiable information.
How Payment Initiation Services can be used with Account Initiation Services
Payment Initiation Services (PIS) and Account Information Services (AIS) are two key elements of Open Banking that can work together to offer valuable finance solutions.
Payment Initiation Services enable third-party providers to initiate payments from a user’s bank account, with their consent.
Account Information Services enable third-party providers to access a user’s bank account information, with their consent.
PIS and AIS are particularly useful when used together as they can offer powerful financial services that enable users to better manage their money.
For example, a third-party provider such as a mobile budgeting app could offer users a single financial dashboard that consolidates the activity of several bank accounts (using AIS) and enable users to transfer money between bank accounts (using PIS). Or they could analyse a user’s spending patterns (using AIS) and enable users to sign up for a new personalised financial product (using PIS).
Exploring Open Banking Payments potential
PIS, more often referred to as Open Banking Payments, can improve how transactions are processed for millions of users. By enabling direct, secure and instant account-to-account payments, Open Banking Payments can result in lower costs, improved efficiency and enhanced security compared to traditional payment methods.
Another key element within Open Banking Payments is Variable Recurring Payments (or Commercial VRPs). This form of payment allows merchants to initiate pull payments from a user’s bank account on a recurring basis, based on a predefined set of parameters agreed upfront with the payer. While VRPs can process varying amounts, they can also process fixed amounts. This flexibility makes them useful for various use cases, such as usage-linked utility bills or subscription services with either fixed or fluctuating costs.
Sweeping VRPs (sometimes referred to as “me-to-me” payments) are a specific type of VRP that enables users to automatically transfer money between their own bank accounts. This can be used to transfer money based on predefined rules or triggers, such as transferring excess funds that are above a certain threshold to a savings account.
VRPs offer many benefits, including simpler user experiences (e.g. authorise ongoing payments just once), more flexible payments (e.g. reducing the risk of missed or late payments), potential cost savings (e.g. for businesses and users) and enhanced security.
One particular area where we see significant potential for Open Banking Payments is within government agencies. For example, it could help with enabling recurring payments for council tax, reducing the risk of missed or incorrect payments and associated debt collection costs.
Challenges of Open Banking Payments
While Open Banking Payments (OBP) offers many benefits, there are several challenges to consider.
For merchants, it can take time to integrate OBP into their systems, particularly if they don’t have the internal expertise to guide them. Technical requirements, software integration, legal obligations and operational changes all need to be understood. But third-party Open Banking Payment solutions, such as Moneyhub, can help mitigate these challenges by offering pre-built integrations, easy-to-use tools and expert guidance.
Open Banking Payments are evolving to suit a range of use cases. And while the current user experience can be more complex than traditional methods to set up, including strong customer authentication (SCA), there are ongoing developments to streamline this process. As the technology matures, OBP has the potential to become as seamless as contactless card payments or mobile wallets. Dispute mechanisms will also be developed to improve consumer protection (and confidence).
Open Banking Payments have particular potential for high-value purchases and subscriptions, where increased security and direct account-to-account transactions provide significant advantages. The current user experience involves strong customer authentication (SCA) and there are on-going developments to streamline this process through payment methods such as Variable Recurring Payments. Plus, the cost savings associated with Open Banking Payments are more notable on high-value transactions, benefitting both merchants and customers.
Which industries will benefit most from Payment Initiation Services?
Many industries are poised to benefit from Payment Initiation Services (PIS):
Banks can leverage PIS for more efficient and cost-effective A2A payments for account deposits. PIS can streamline the deposit process, reduce reliance on traditional, less efficient payment methods, and facilitate sweeping functionality, allowing customers to easily transfer funds between accounts or pay off fluctuating credit card balances. PIS can help banks improve customer engagement, increase deposit balances and promote financial wellness through greater understanding.
Fintech companies can integrate PIS to enhance their services. For example, they can use it to offer instant account-to-account payments within their platforms or mobile apps. And they can use it to automate features such as moving money from their bank account to another financial product, such as savings or investment accounts. These features would empower their customers by giving them more control of their money.
Utility providers can use PIS to offer flexible, customer-friendly payment options. With commercial Variable Recurring Payments (VRPs), providers can set up regular payments that automatically adjust based on the amount available in a customer’s bank account, helping customers manage their finances better and avoid costly overdraft fees or other penalties. By collecting payments directly from a customer’s bank account, utility providers can reduce the risk of missed or failed payments and the resulting service disruptions or administrative costs. And all this can improve customer satisfaction and loyalty.
Government agencies can use PIS to streamline the collection of taxes, fines and many other types of payments from residents. Because government agencies operate at considerable scale, enabling direct account-to-account transfers can significantly reduce processing and administrative costs compared to processing cheques, cash and card payments. And this can result in faster, more secure and more efficient payment collection that benefits residents too.
As Payment Initiation Services continue to gain traction, many more organisations will come to recognise the benefits it brings to their operations and their users.
Could you benefit from using our Payment Initiation Services?
At Moneyhub, we enable both commercial and public sector organisations to leverage our Open Banking technology and gain a range of benefits including Payment Initiation Services.
Whether you want to create your own solution or integrate one of our existing solutions, our expert team is ready to help identify your needs and guide you through the process from start to finish.
To learn more about the impact Open Banking Payments could have on your organisation, contact us.