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21 May 2024 Article

The Comprehensive Guide to Payment Initiation Services (PIS)

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The digital payments landscape is undergoing transformative changes, with Payment Initiation Services (PIS) at the forefront. PIS enables direct financial transactions between consumers and businesses without the need for traditional banking intermediaries, thus streamlining payments.

As part of an evolving digital ecosystem, Payment Initiation Service Providers (PISPs) are playing a crucial role in the development of open banking. In particular, they offer payments products (such as instant account-to-account payments) that ensure transactions are fast, secure, and compliant with regulatory standards.

PIS and PISPs are instrumental in redefining today’s financial transactions by providing an alternative to traditional payment methods such as credit cards and bank transfers. They facilitate the direct movement of funds between accounts, leveraging open banking capabilities to enhance the efficiency of payments and enrich the customer experience. This capability aligns with Europe’s broader objectives of the Revised Payment Services Directive (PSD2 and more recent update, PSD3).

In this article, we’ll define payment initiation services and explore what a payment initiation service provider (PISP) does, delving into its role and the current regulatory environment. We will also compare them with account information service providers (AISPs). Plus, we will examine how these services integrate into the broader digital payment ecosystem and how they enhance transaction security and streamline financial operations. 

What is a payment initiation service (PIS)?

A Payment Initiation Service (PIS) is a modern financial utility that facilitates direct bank-to-bank transactions. By allowing an authorised third-party provider (TPP) to access a user’s bank account for initiating transfers, PIS bypasses conventional payment methods — such as credit cards — potentially reducing transaction fees and processing times. 

This capability is particularly pivotal in the context of Europe’s PSD2, which provides a robust regulatory framework to ensure stringent security measures and consumer protections are in place.

The technology underpinning PIS involves advanced encryption and strict compliance protocols — designed to safeguard transaction data, ensure a secure transfer of funds between bank accounts, and thus bolster consumer confidence in digital payments.

What is a payment initiation service provider (PISP)?

A Payment Initiation Service Provider (PISP) is an entity authorised to perform payment services on behalf of customers. These providers operate under financial regulatory oversight to ensure secure and reliable transaction processing.

To become a PISP, a service must meet compliance standards set by financial authorities, which include rigorous security assessments and operational integrity evaluations. Entities that typically become PISPs include a diverse spectrum of businesses, from tech startups and financial service companies to traditional banks that have integrated digital interfaces to extend their service offerings in the realm of PIS.

For example, a third-party provider, such as Brite Payments, is a PISP.

Account information service providers (AISPs) Vs. Payment initiation service providers (PISPs)

While both types of open banking-powered service fall under the umbrella of financial technology enhancing consumer convenience, Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) serve distinctly different functions.

AISPs consolidate information from various bank accounts, offering a comprehensive view of a user’s finances. This service provides valuable insights, helping users manage their financial health effectively. Even more crucially, it enables TPPs to view a customer’s account details for a range of services, such as account verification or setting up a future recurring payment.

 In contrast, PISPs execute actual transactions, directly transferring funds between accounts upon user authorisation. These services facilitate everything from routine bill payments to complex e-commerce purchases. This functionality not only enhances the efficiency of financial transactions but also supports broader financial management and spending autonomy for consumers.

For a further explanation of the benefits of Account Information Services, you can explore more detailed insights in our dedicated AIS Benefits article

It is also worth noting that payment providers such as Brite offer products and services that combine AIS and PIS, enabling customer onboarding, verification, and payment in one easy process.

How has open banking enabled PISPs?

Open banking has significantly reshaped the financial services landscape by mandating banks to open access to their data through secure APIs. This regulation allows PISPs to initiate direct bank-to-bank transactions and bypass traditional payment systems like credit and debit cards (saving businesses time, reducing chargebacks, and importantly cutting fees).

The introduction of the EU’s Second Payment Services Directive (PSD2) has been crucial. It promotes innovation while ensuring security and consumer protection. PSD2 enables PISPs to offer efficient payment services by directly accessing user bank accounts to initiate payments with the user’s consent.

Furthermore, PISPs benefit from “read-write” access under open banking, allowing them to perform transactions and not just view financial data. This capability supports diverse financial activities, enhancing transaction speed and reducing costs, thereby transforming the digital payments ecosystem. The PISP open banking model significantly enhances how financial transactions are conducted, providing a framework that boosts efficiency while ensuring security.

By integrating PISP open banking practices, the financial industry can leverage advanced technological solutions to streamline payment processes and enhance user experience. This integration simplifies the transaction process while providing a safer and more efficient way to manage payments in the digital age.

A brief history of open banking and PIS

Origins and regulatory foundations:
As highlighted by GOV.UK: “Open Banking was initiated in 2017 as part of a package of remedies by the CMA to increase rivalry in the provision of retail banking services.” However, open banking‘s roots can be traced to regulatory efforts aimed at increasing competition and transparency within the financial services sector. The concept was significantly propelled by the European Union’s PSD2 (Second Payment Services Directive), which mandated that banks were required to open up their data to third-party providers under strict customer consent protocols.

Development of standards and protocols:
As regulatory frameworks were established, technical standards and protocols were developed to ensure secure data sharing between banks and third-party providers. These standards were crucial in addressing initial data security and consumer protection concerns — laying the groundwork for a trust-based open banking ecosystem. The implementation of these standards has facilitated the seamless and secure exchange of financial information, enabling new services and improving customer experiences.

Impact on financial services: The introduction of open banking has led to the creation of various financial services that leverage access to banking data.  This enabled the emergence of PISPs, which use this data to provide streamlined payment solutions. This initiative has benefited businesses and consumers with more efficient payment processes.

Future prospects and integration with PIS:
As the regulatory framework evolves, the introduction of the EU’s PSD3 and enhancements by the Payment Services Regulation (PSR) are set to refine PIS’s capabilities further. These developments aim to bolster PIS’s security and customer-centric aspects, ensuring faster financial transactions and higher standards of transparency and consumer protection.

How secure are payment initiation services transactions?

Transactions via PIS offer a heightened level of security when compared to traditional card payments. By implementing advanced security measures like strong customer authentication (which includes multi-factor authentication and end-to-end encryption), PIS greatly reduces the risk of data breaches and unauthorised transactions.

Furthermore, these services are consistently monitored through rigorous security audits and adhere to strict compliance standards set by financial regulatory bodies. This level of oversight surpasses the security protocols of traditional card payments — which are vulnerable to physical theft and data skimming. By eliminating the need to enter or store physical card details, PIS significantly enhances transaction security, offering greater peace of mind to both consumers and merchants.

The benefits of payment initiation services

PIS for consumers: 

PIS’s buy now, pay now model offers a stress-free financial model for consumers. With this approach, payments are made instantly at the point of purchase, ensuring that consumers do not have to remember to pay bills later and avoiding any potential reminder fees or late charges. This immediacy not only simplifies the purchasing process but also enhances the security and transparency of transactions. More often than not, a customer will use a PIS service under the consumer-facing term, Pay by Bank, which is an account-to-account payment or bank transfer.

PIS for businesses: 

Businesses greatly benefit from the immediate confirmation of payments and quicker access to funds that PIS provides. This immediacy can significantly improve a company’s cash flow, which is essential for operational stability and growth. Moreover, PIS often incurs lower transaction fees compared to traditional credit card processing, further enhancing a business’s profitability. The streamlined process reduces the administrative burden and speeds up the reconciliation of accounts, making financial management more efficient.

These benefits demonstrate PIS’s dual advantages, highlighting why it’s becoming a preferred method for financial transactions in a digital-first world. Indeed, now is the time to offer a PIS, or Pay by Bank method in your checkout.

Learn more about payment initiation services with Brite

Payment initiation services and account information services are at the heart of the Brite Instant Payments Network. From Instant Payments and  Payouts to instant reconciliation and customer verification for businesses, Europe-wide, Brite is helping pave the way for a new and exciting payments landscape.  

If you would like to learn more about how Brite Payments can help you provide instant A2A payments and other innovative financial products, please contact our payments experts. As a second-generation open banking-powered AISP and PISP, we are at the forefront of payment technology in Europe.

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