Understanding Payment Instrument Issuer Service Providers (PIISP)

In this third and final article of our series on Open Banking players, we’ll focus on Payment Instrument Issuer Service Providers (PIISP). While PISPs initiate payments and AISPs provide financial insights through aggregated data, PIISPs play a crucial role in ensuring the availability of funds and guaranteeing secure payments. This article will explore the role of PIISPs, their connections to the other actors in Open Banking, and how they contribute to a secure, seamless financial ecosystem.

What is a PIISP?

A Payment Instrument Issuer Service Provider (PIISP) is an entity responsible for issuing payment instruments (e.g., debit cards, credit cards) and providing real-time confirmation of funds for transactions.

A PIISP usually issues the card payment instruments without directly holding the funds. The issued cards are linked to accounts hold by the Account Servicing Payment Service Providers (Major Banks). When a user initiates a transaction using such a card, the PIISP doesn’t have direct access to the user’s bank account balance. Therefore, it relies on an AISP (Account Information Service Provider) to confirm the balance availability on behalf of the cardholder, given the cardholder’s consent.

In the Open Banking framework, PIISPs ensure that there are sufficient funds in a customer’s account before initiating or completing a transaction. This function is critical in reducing the risk of failed payments and providing confidence to merchants and service providers, particularly in high-value or recurring transactions. By offering a real-time check on account balances, PIISPs ensure that transactions are completed smoothly, contributing to a more secure financial ecosystem.

How a Transaction Works with PIISP and AISP

1. Issuance and Agreement: The PIISP issues a payment card or similar instrument linked to the user’s bank account. They obtain the cardholder’s consent to access account information via an AISP for fund verification purposes.
2. Funds Verification: When the user attempts a transaction, the PIISP contacts the AISP to check whether there are sufficient funds in the user’s bank account.
3. Transaction Authorization: Once the AISP confirms the availability of funds, the PIISP authorizes the transaction, and it continues through the standard payment processing flow with the involved PSPs (Payment Service Providers).

This setup enables the PIISP to offer payment services without holding the funds, while the AISP provides real-time account information to validate transactions securely. This model aligns with PSD2 regulations in the EU, promoting secure, third-party-initiated transactions.

How PIISPs Fit into the Open Banking Landscape

While PISPs initiate payments and AISPs aggregate data for financial management, PIISPs function more in the background but play a crucial role in ensuring transaction success. Here’s how they interact with the other actors:

1. Supporting PISPs in Transaction Validation:
   When a PISP initiates a payment, it often relies on a PIISP to confirm the availability of funds in the payer’s account. This real-time check reduces the risk of failed payments due to insufficient funds, which is particularly useful in e-commerce or subscription-based services. For example, before a PISP like GoCardless initiates a direct debit, a PIISP ensures the customer has enough balance to complete the transaction.
2. Enhancing AISP Insights:
   While AISPs focus on aggregating data across accounts to provide insights into spending and savings, PIISPs can contribute to these insights by providing real-time updates on available funds. This collaboration improves financial planning and management by ensuring that users have accurate, up-to-date information.
3. Reducing Risk in Payment Initiation:
   The PIISP plays a risk-mitigating role by verifying whether an account has sufficient funds before a PISP processes a transaction. This ensures payment certainty for both merchants and consumers, creating a frictionless payment experience where transactions are less likely to be declined.

Real-World Applications of PIISPs

1. Confirmation of Funds for Recurring Payments:
   Many businesses, especially those offering subscription services, need to ensure that customers have the necessary funds for recurring payments. PIISPs provide fund confirmation before these payments are initiated, reducing the risk of failed transactions. This process is essential for services like Netflix or Spotify, where regular payments need to be processed without interruption.
2. Credit Card Issuers:
   Traditional credit card providers also act as PIISPs. By issuing credit cards, they are responsible for validating transactions and ensuring that there are sufficient credit limits available before approving payments. These real-time checks are key in fraud prevention and ensuring secure transactions.
3. High-Value Transactions:
   For luxury retailers or businesses dealing with high-value items, having confirmation of funds is crucial. A PIISP ensures that funds are available before a large transaction is processed, giving both parties confidence that the payment will not fail at the last minute.

How PIISPs Improve Financial Security

1. Fraud Prevention:
   PIISPs play a key role in preventing fraud by verifying the availability of funds before any transaction takes place. This reduces the risk of overdrafts, unauthorized payments, or fraudulent transactions where insufficient funds could lead to financial loss.
2. Improved Transaction Certainty:
   One of the biggest benefits of PIISPs is providing certainty in transactions. Whether it’s a large purchase or a recurring payment, knowing that there are sufficient funds in the payer’s account adds a layer of confidence for both the merchant and the customer.
3. Stronger Customer Authentication (SCA):
   Like PISPs and AISPs, PIISPs are also required to comply with Strong Customer Authentication (SCA) under PSD2. This ensures that the real-time checks on fund availability are secure and protected against fraud, maintaining a high level of consumer protection throughout the payment process.

Challenges for PIISPs

While PIISPs play a crucial role in ensuring secure and smooth payments, they face several challenges:

1. API Standardization:
   PIISPs, like PISPs and AISPs, rely on bank APIs to access account data and confirm fund availability. The lack of standardization across banks can make it difficult for PIISPs to integrate their services smoothly. This can lead to inconsistent service quality, particularly for smaller banks or fintechs that may not have fully developed APIs.
2. Real-Time Data Access:
   For PIISPs, providing real-time fund confirmation is essential. However, ensuring that this data is up-to-date and accurate can be challenging, especially when dealing with multiple banks or financial institutions. Delays in data access or updates could lead to failed transactions or security risks.
3. Regulatory Compliance:
   Like all Open Banking players, PIISPs must comply with strict regulations such as GDPR and SCA. Ensuring that they meet these compliance requirements while maintaining a seamless user experience can be resource-intensive, particularly for smaller fintech companies looking to scale their operations.

The Future of PIISPs in Open Banking

As the Open Banking landscape evolves, the role of PIISPs will likely expand, driven by increasing demand for seamless, secure payments. Several trends are expected to shape the future of PIISPs:

1. Integration with Open Finance:
   As the scope of Open Banking expands to include more financial products—such as investments, pensions, and insurance—PIISPs will play an important role in confirming funds for a wider range of financial transactions. This broader integration could help streamline cross-border transactions and enhance the global financial ecosystem.
2. Collaborations with PISPs and AISPs:
   We can expect deeper collaboration between PIISPs, PISPs, and AISPs to offer more comprehensive services. For instance, PIISPs could integrate more closely with PFM tools to provide users with real-time fund availability insights, while AISPs could use PIISP data to offer more accurate financial advice.
3. Increased Adoption Across Industries:
   As more industries move toward digital payments and subscription models, the role of PIISPs in providing secure, real-time payment verification will grow. We may see PIISPs being used in industries like healthcare, education, and utilities, where recurring payments and large transactions are common.

Conclusion

Payment Instrument Issuer Service Providers (PIISP) are the behind-the-scenes players that ensure transactions run smoothly by confirming the availability of funds before payments are initiated. While less visible than PISPs or AISPs, PIISPs are vital to the success of the Open Banking ecosystem, helping to reduce failed payments, increase transaction security, and ensure smooth financial operations.

As Open Banking continues to expand, the role of PIISPs will evolve, integrating with other players in the ecosystem to provide more robust, secure, and real-time financial services. Together with PISPs and AISPs, PIISPs are shaping the future of a more interconnected, innovative, and secure financial landscape.

And if you want to get the keys to understand and study any payment systems anywhere in the world, check out our Payments Fundamentals course on paymerix.com.