Open Banking explained: AIS, PIS, and Pay by Bank

Open Banking is one of those terms that gets used loosely and in multiple contexts. Consequently, it has come to mean anything from account aggregation apps to instant payment links to credit decisioning tools. The underlying framework is more specific, more regulated, and more consequential than the casual usage suggests.

This article explains what Open Banking is as a UK and EU regulatory framework, how the two core service types work, and what it means for businesses making and receiving payments.

What is Open Banking?

Open Banking is a UK and EU regulatory framework, originating from the EU's PSD2 Directive, that enables FCA-authorised third parties to access bank account data and initiate payments, with the explicit consent of the account holder.

Open Banking itself is not a product. It is the framework that FCA-authorised providers build services on top of. Think of it in terms of roads and taxis. Open Banking is an example of a road network. Different services that use Open Banking's network are like the different taxi companies.

How does Open Banking work?

APIs and authorisation

Banks provide standardised application programming interfaces (APIs) that FCA-authorised providers, known as Third Party Providers (TPPs), connect to. These APIs give TPPs controlled access to specific account functions, within the scope of what the account holder has consented to.

FCA authorisation is the trust mechanism. Not all services claiming to use Open Banking are regulated. If a provider is not FCA-authorised as an Account Information Service Provider (AISP), a Payment Initiation Service Provider (PISP), or both, they do not have the legal right to access account data or initiate payments under the Open Banking framework.

Critically, the customer's bank credentials never leave their bank. When a customer authorises an Open Banking connection, they authenticate directly with their own bank, not with the third-party provider. The TPP receives a limited, time-bound consent token, not the customer's login details.

Two types of Open Banking service

Open Banking covers two fundamentally different things. Understanding the distinction is important because they serve different purposes and carry different implications.

Account Information Services (AIS): read-only access to account data.

An AISP can retrieve transaction history and balance information, with the customer's consent. AIS is used for credit assessments, affordability checks, income verification, and account aggregation. It reads data but does not initiate any movement of money.

Payment Initiation Services (PIS): the ability to trigger a payment directly from a customer's bank account, with their consent. This is the mechanism behind Pay by Bank, Modulr's payment initiation product. PIS does not read transaction data, and it does not share the customer's balance with the payee. It initiates a payment instruction.

The distinction matters. An AIS provider can, with the customer's consent, see account data including balance information. This is a necessary part of the data set for services such as credit assessments. A PIS provider cannot see balance data or transaction history. It only initiates a payment. In some recurring payment contexts, such as Variable Recurring Payments, a binary funds-availability check returns a yes or no signal, not a balance figure. So, it is wrong to assume that a Pay by Bank payment shares balance data with the payee. It does not. Be careful not to confuse AIS and PIS on this point.

What is Open Banking used for?

There are four things that Open Banking is used for: payment initiation, credit decisioning, account verification, and variable recurring payments.

• Payment initiation: a customer authorises a payment directly from their bank account, without entering card details. Settlement is via Faster Payments, typically within seconds. The regulatory term is Payment Initiation Service (PIS). At Modulr, we call this Pay by Bank.
• Credit decisioning: lenders use Account Information Services (AIS) to assess affordability and verify income in real time, without requiring payslips or paper bank statements.
• Account verification: confirming that a bank account belongs to the person claiming it before setting up a payment relationship. It is often used in place of Confirmation of Payee to retrieve bank details directly from the bank, rather than relying on manual entry.
• Variable Recurring Payments (VRP): an Open Banking mechanism that allows a customer to give ongoing consent for variable payments to be taken from their bank account, without needing to re-authenticate each time. Unlike Direct Debit, payments settle instantly via Faster Payments and the customer can view, amend or cancel consent at any time through their banking app. You may also see VRP referred to as "bank on file" — a term used in the industry to describe its function as a bank-account-based alternative to storing card details. At Modulr, we offer commercial and sweeping variable recurring payments, which we call commercial VRP or cVRP and sweeping VRP or sVRP respectively.

Is Open Banking safe?

Yes, Open Banking is considered safe. Open Banking's safety rests on three structural features.

FCA authorisation: only providers registered with the FCA as AISPs or PISPs can legitimately access account data or initiate payments under the Open Banking framework. Consumers can verify a provider's status on the Financial Services Register.

Consent specificity: the customer's consent is explicit, scoped to a particular purpose, and time limited. Consent to share transaction data for a credit check does not give ongoing access to initiate payments. Each type of access requires its own consent.

No credential sharing: the customer authenticates directly with their own bank using their existing login credentials. The third-party provider never sees or stores the customer's bank password or authentication details.

Open Banking vs card payments

For businesses considering Open Banking as a payment acceptance method, the comparison with card payments is relevant.

• No interchange fee: Open Banking payments bypass the card networks (Visa, Mastercard, American Express, and others) entirely, so there are no interchange fees to pay.
• Faster settlement: Open Banking payments settle via Faster Payments, typically within seconds. Card payments typically settle on a T+1 or T+2 basis.
• No card expiry: bank account details do not expire the way cards do, so there are fewer failed payments, less dunning, and a smoother experience for customers, particularly for recurring collections.
• Different fraud profile: card payments carry card-not-present fraud risk. Open Banking payments carry Authorised Push Payment (APP) fraud risk instead. The payer authorises the payment directly from their bank, so the fraud risk profile shifts.
• Familiarity and disputes: cards remain the payment method most consumers recognise, and some buyers expect card-style chargeback rights. Open Banking is newer at the checkout and relies on the APP fraud reimbursement regime rather than chargebacks, so it is worth setting dispute expectations clearly with customers.

Open Banking in the UK

The UK has one of the most developed Open Banking ecosystems globally. This is partly a function of the CMA remedy mandating participation from the nine largest banks, which created a baseline of availability that optional adoption alone would not have produced. The combination of regulatory mandate, FCA authorisation framework, and the Faster Payments scheme as the underlying payment rail gives the UK a distinctive foundation. The What is Bacs? article explains how the Bacs payment scheme operates alongside Faster Payments and CHAPS in the broader UK payments landscape.

More recently, the UK Payments Initiative (UKPI) has added another important layer to the UK Open Banking landscape. Launched in 2026, UKPI is an industry-led scheme designed to support commercial Variable Recurring Payments, with shared rules, operating standards and a commercial model for recurring account-to-account payments. This matters because it helps move Open Banking payments beyond one-off bank transfers and towards more scalable recurring payment use cases.

Modulr helps businesses manage pay-ins and pay-outs across Open Banking, cVRP, Bacs, Faster Payments, and CHAPS, including Pay by Bank for payment initiation and Variable Recurring Payments for recurring collections. Discover how Modulr helps businesses with Pay-ins and Pay-outs.

Disclaimer: This article is for informational purposes only and should not be construed as financial, legal, or regulatory advice.

TL;DR

Open Banking is a UK and EU regulatory framework (originating in the EU's PSD2 Directive), not a product. FCA-authorised providers use it to access bank account data (AIS) or initiate payments (PIS). AIS can include balance data with the customer's consent; PIS cannot. At Modulr, Pay by Bank is our payment initiation product, and cVRP and sVRP are our commercial and sweeping Variable Recurring Payments products.

FAQs

What is the difference between AIS and PIS in Open Banking?

AIS provides read-only access to bank account data — including transaction history and balance — with the account holder's consent. PIS triggers a payment directly from a customer's bank account. AIS reads data; PIS moves money. Each requires separate FCA authorisation.

Does Open Banking give businesses access to a customer's bank balance?

It depends on the service type. An AIS provider can see balance and transaction history, with the customer's consent. A PIS provider cannot — it only initiates a payment. For Variable Recurring Payments, a funds-availability check returns a yes or no signal, not a balance figure.

What is Pay by Bank?

Pay by Bank is Modulr's Open Banking payment initiation product (PIS). It lets a customer authorise a payment directly from their bank account, settling via Faster Payments, typically within seconds.

What is bank on file?

"Bank on file" is an industry term for Variable Recurring Payments (VRP), which let a customer give ongoing consent for variable payments from their bank account without re-authenticating each time. Unlike Direct Debit, payments settle instantly via Faster Payments. At Modulr, we offer commercial VRP (cVRP) and sweeping VRP (sVRP).

Is Open Banking regulated in the UK?

Yes. Only FCA-authorised providers can access account data or initiate payments under the framework: Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). Consumers can verify a provider's status on the Financial Services Register.

How is Open Banking different from card payments?

Open Banking payments bypass card networks entirely, with no interchange fee. Settlement is via Faster Payments, typically near-instant, compared to T+1 or T+2 for card payments. The fraud profile also differs: card payments carry card-not-present fraud risk. Open Banking payments carry Authorised Push Payment (APP) fraud risk instead.