Open Banking Glossary
Open Banking doesn't need to be complicated. Here, we break down all the jargon and acronyms.
1033 Dodd-Frank is an abbreviation and refers to Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1033 grants consumers the right to access their own financial information held by banks and other financial institutions.
Section 1033 is a step forward to creating empowered consumers with greater control of their financial data and allowing them to access and share their financial information electronically. This has great implications for supporting innovation and competition in the financial services sector without compromising on the importance of consumer consent and data security.
ACH (Automated Clearing House) is the network for electronic financial transactions in the US. The ACH Network facilitates funds transfer between banks and financial institutions, such as direct deposits, consumer payments, B2B payments, and more. ACH payments get processed in batches and are known for their efficiency, reliability, and cost-effectiveness. The Clearing House runs the ACH Network, and Nacha is its governing body.
A2A (Account-to-Account) Payments are direct funds transfers from one bank account to another. A2A payments occur directly between the payer and the payee; no middlemen are involved. This payment type is often utilized for various transactions, including P2P (Person-to-Person) transfers, bill payments, and B2B transactions. A2A Payments leverage the ACH Network to process fund transfers and have rapidly grown in popularity in the US.
The primary goal of account verification is to ensure that the individual claiming ownership of an account is the legitimate account holder. Account verification is crucial in ensuring merchants comply with KYC and AML regulations. In the context of Open Banking, Account verification often uses consumer-permissioned bank data accessed via API to quickly and accurately onboard consumers.
AML (Anti Money Laundering) are the regulations, policies, and standards set by law to prevent and detect money made through illegal means passing as legitimate. AML efforts also combat the financing of terrorism. KYC is an important part of AML efforts that all merchants and financial institutions must adhere to.
An Application Programming Interface (API) is a set of defined protocols, standards, and tools that allow third-party developers to access and interact with consumer-permissioned financial data from banks to provide and build personalized financial products and services.
Approval rates in payments refer to the percentage of transactions that are successfully authorized and approved for processing. Generally speaking, it’s better to have high approval rates. Optimizing approval rates is critical for businesses to ensure a smooth customer payment process, minimize transaction abandonment, and prevent revenue loss.
The CFPB (Consumer Financial Protection Bureau) is an independent government agency established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The central mission of the CFPB is to protect consumers in the financial marketplace by promoting financial education, enforcing consumer protection laws, and ensuring fair and transparent practices.
Churn is the rate at which customers discontinue using a service or product. There are two types: voluntary and involuntary. Voluntary churn occurs when consumers willingly leave a service or stop using a product for whatever personal reasons such as high cost, dissatisfaction, etc. Involuntary churn is when consumers cannot make purchases or continue services due to payment errors primarily rooted in card-not-present transactions.
FDATA (Financial Data and Technology Association) is a global trade association that advocates for Open Banking, fintech interoperability, and consumer data privacy rights. FDATA promotes competition, innovation, and consumer choice in the financial services industry, particularly in the context of Open Banking and Open Finance.
FedNow is the new Real-Time Payment service introduced by the Federal Reserve. The Federal Reserve developed FedNow to enhance the speed and efficiency of the U.S. payment system. The service aims to enable individuals and businesses to make Real-Time Payments, 24/7, 365 days a year. As the service continues to evolve, it is expected to significantly impact how we conduct financial transactions in the US.
Faster Payments refer to accelerated transaction processing, allowing for quicker fund transfers than traditional payment methods. While not necessarily instantaneous, they offer a faster alternative for financial transactions.
Financial Inclusion is the equal availability of financial services and opportunities across all societal, cultural, and economic borders that can help people build wealth. Improving financial inclusion is essential for every country to thrive.
In the context of user experience, friction refers to any obstacles, complications, or difficulties in the interaction between a user and a product or service. Reducing friction enhances the usability and efficiency of a system. Some examples of friction include long verification timelines, micro deposits, finding routing numbers and account numbers, replacing card information after expiration, etc.
Friendly fraud, or chargeback fraud, occurs when a consumer purchases a product using a card and later disputes the charge with their card issuer, claiming the transaction was unauthorized or fraudulent. Despite the term "friendly," it is not a genuinely amicable act but rather a misrepresentation of the transaction, whether intentional or unintentional, to effectively steal from a merchant.
Guaranteed Payments assure the secure and certain transfer of funds, minimizing the risk of payment failures and eliminating the risk of chargebacks. This provides the payer and payee confidence that the transaction will be completed successfully.
Identity Verification is important for fulfilling KYC requirements and fighting against fraud and other malicious actors. Identity Verification involves validating consumer information, including personal details, biometric information, and more.
Instant payouts refer to the rapid transfer of funds to recipients with minimal delay. This process allows individuals to receive funds almost immediately after initiating a transaction. Instant payouts have become increasingly popular in the digital age, offering numerous benefits in convenience, efficiency, and improved user experiences.
In basic terms, ISO 20022 is an international standard for the electronic exchange of financial messages between financial institutions and other entities involved in financial transactions. It provides a standardized format and structure for the information in these messages, facilitating consistent and efficient communication in the financial industry.
KYC (Know Your Customer) is a regulatory process in which financial institutions verify the identity of their customers to prevent fraud, money laundering, and other illicit activities. It involves collecting and validating customer information. Failing to adhere to KYC regulations and standards can result in legal and financial penalties and reputational damage.
Nacha (National Automated Clearing House Association) is the governing body that sets rules and regulations for the ACH Network run by The Clearing House to ensure its smooth and efficient operation and is key to its integrity and effectiveness. Nacha is not affiliated with the US Government and is operated by its members, typically payments processors and other entities involved in the ACH Network.
Open Banking is a financial practice that allows third-party financial service providers to access, share, and utilize customer banking data with the account holder's consent. It involves using APIs that enable different financial institutions and fintechs to interact and exchange information securely.
Open Finance extends the principles of Open Banking to include a broader range of financial services, enabling third-party access to various financial data beyond traditional banking, such as investments, insurance, and more.
Pay by Bank is an alternative payment method to cards that allows consumers to purchase online or through mobile directly from their bank accounts. All the consumer needs to do to Pay by Bank is authorize their purchase through their online banking credentials.
Real-Time Payments (RTP) involve the instantaneous transfer of funds between parties. This quick and efficient payment system ensures that transactions occur in real-time, providing immediate access to funds. Real-Time Payments are done on Real-Time rails such as the RTP Network provided by The Clearing House and FedNow, released July 2023.
RfP (Request for Payment) is typically a formal document or communication to request payment from another party. The RfP outlines the payment request details, including the amount owed, the due date, and instructions on how to make the payment.
SCA (Strong Customer Authentication) is a regulatory requirement in Europe requiring that checkout flows verify identity through two of the three following ways: knowledge (such as a password), possession (such as a mobile phone number), and inherence (such as a fingerprint or face ID). Although not a hard requirement in the US, many companies follow SCA best practices to reduce the risk of fraud.
The Clearing House is a privately run banking association and payments company operated by a consortium of large US banks. It provides financial services and payment systems for its member banks, facilitating clearing and settling payments such as checks, wire transfers, and ACH transactions.