It is crucial to understand the new entrants’ role as a TPP in the Open Banking world, knowing that they can significantly change the current status quo as well as challenge the entire banking ecosystem. They are a source of innovation for the industry, provoking incumbents to transform.
Regulatory changes in Open banking have led to major implications for TPPs. For example, the European Payment Services Directive (PSD2) lays the foundation for “improving the level playing field for payment service providers (including new players)”. With PSD2, non-banking players are not only allowed to play the banking game but also to access banking data. That’s a huge game-changer.
Let’s explore TPPs and their role in the Open Banking ecosystem.
What is a TPP?
TPP is short for Third Party Provider. As suggested by its name, a TPP is an organisation which interacts with a bank to provide services to consumers.
In a traditional relationship with a bank, the consumer would interact directly with the bank. With a TPP, the consumer interacts with the TPP, that then interacts with the bank.
There are two types of TPPs: AISP and PISP.
AISP stands for Account Information Service Providers. AISPs are allowed to retrieve information on your behalf from your bank. However, they can only access information and not initiate payments.
PISP are Payment Initiator Service Providers. Opposite to AISPs, PISPs are allowed to initiate payments on your behalf from your bank.
Who is a third party provider (TPP)?
In the Open Banking Ecosystem, new entrants and TPPs are closely related, as new entrants can become third party providers. New entrants are all new companies and entities – such as fintech startups, neo-banks, merchants, payment providers, retail and tech companies, who are, by law and regulation, not traditional banking institutions. However, they want to make use of and benefit from gaining access to data provided by incumbent banks. They do this by becoming TPPs.
The role of TPPs as new entrants in Open Banking
It is an objective of the regulatory framework in Europe (PSD2), Australia (CDR - Customer Data Right) or later in Mexico (Fintech Law) to make payment markets more transparent.
This was originally driven by the PSD2 within the European Union, introduced to achieve two main objectives:
Firstly, to oblige banks to open their banking data to third parties through public interfaces.
Secondly, to enable non-banking providers - namely the new players – to enter the payments domain and become payment providers.
These major changes ultimately allow for significantly more competition in banking and financial services.
Referring to the Basel Committee on Bank Supervision Report on the Open Banking and application programming interfaces (APIs), published in November 2019, “In some jurisdictions, such as Australia, competition authorities are responsible for the implementation of open banking frameworks to increase competition in the banking sector and to foster innovation”.
In other jurisdictions, such as the EU, India, Hong Kong and Singapore, the central bank or bank supervisor oversees the framework to facilitate faster and easier payments and to foster innovation.
The scope and degree of prescription vary across jurisdictions. For example, in the EU, the focus has been on payment accounts data.
Some of the services provided by TPPs were already available before but were unregulated and difficult to implement. Bringing them within a regulatory framework helped boost transparency, innovation and security and created a level playing field between different payment service providers.
To properly operate, both AISPs and PISPs require having access to banking data therefore being connected to public APIs that banks are obliged to provide.
These two fundamental roles, or functionalities, should be treated as building blocks for many use cases and new models that can be created by the new players.
The majority of new TPPs take the AISP role: providing account information and account aggregation related services. For consumers, these include services such as PFM (personal finance management), financial tracking tools, budget or account dashboards, and debt monitoring.
For businesses, in particular SMEs, the services entail cash management services and BFM (Business Finance Management). New Entrants often obtain a combined license for both Account Information and Payment Initiation services.
Incumbent banks can also take the role of TPPs and get access to other banks or other third parties to extract their data, for example for multi-banking services.
Quick takes on Third Party Providers in Open Banking
- TPPs (Thirds Party Providers) can primarily play the role of an Account Information Service Provider (AISP) and/or Payment Initiation Service Provider (PISP).
- There are not that many new entrant TPPs registered as of now in 2020, especially at the local level. But we will definitely witness the number of non-bank TPPs growing.
- The UK is a leader in the European/EEA territory in terms of the number of registered new entrants, while Germany is the leader within the EU.
- Most use cases represented by new entrants so far are related to AIS - account information services and account aggregation.