June 16, 2021

Drive Innovation and Inclusion in Real-Time Payment Networks with Payment Initiation Service Providers

by Michael Richards and Paul Makin in Financial Inclusion , Fintech , Mojaloop 0 comments

Imagine a digital economy in which any business could send or receive funds with any mobile wallet in the country? Or, how much simpler would our lives be if we could identify a wire recipient from a search bar? What if e-commerce platforms could be connected directly to the national payment switch without integrating with them? These are questions that Payment Initiated Service Providers are answering for real-time payment networks. India’s Unified Payments Interface (UPI), is arguably the most successful implementation of a PISP-powered, in part because it allows other tech entities like Google to build and offer services of the infrastructure. So, in collaboration with Google, we enabled Third-party Payment Initiation (3PPI) functionality that unlocks open banking and UPI-like experiences in any market that adopts a Mojaloop-based payment network.

What is a PISP?

A Payment Initiation Service Provider (PISP) is a third-party institution participating in an interoperable payment system that can request payment on behalf of a customer. The PISP itself does not hold an account or a customer’s deposit, or any other financial position in the system. While PISPs are not conventional financial industry members, their integration technology expands the financial sector to include FinTechs that possess close relationships with customers who require payment services but can’t wait for slower traditional banking methods. This functionality empowers FinTechs to build a more immersive customer experience where payments is just one part – albeit a critical part – of the overall service. This system functionality propelled India’s UPI to over 2 billion transactions per month in just over two years.

PISP advances FinTech innovation

Decoupling payment services from traditional banking is not a new trend. Credit card companies started doing this as early as the 1950s. Today, technology companies like Stripe and Plaid have built platforms that make it easy for companies and consumers to connect their financial accounts directly to e-commerce applications. However, the vast majority of deposits still belong to traditional banks who have become specialists in managing those deposits and their corresponding loans. 

Today, it is commonplace for banks to outsource payments and related security measures; accepting their role as payment enablers rather than trendsetters. For this reason, decoupling payment initiation responsibility from the deposit holder is an important initiative. The standard PISP integration into Mojaloop can unblock innovation in multiple sectors by empowering FinTech innovators to offer secure payment services to customers. 

Mojaloop PISP uniquely benefits smaller FIs

Unlike most existing PISP, PSD2 (Payment Services Directive 2), or 3PPI integrations, Mojaloop’s PISP functionality is integrated directly with the payment hub rather than individual banks. By contrast, GPay India must integrate with each Indian bank before it can offer UPI’s PISP services. This increases its cost and perpetuates the advantages that India’s largest banks hold over smaller financial institutions in the country. 

Mojaloop’s PISP design, on the other hand, requires only a single integration with the hub to enable transactions with the whole market. It also means that FinTechs can offer this service without knowledge or reference to the institution that holds the funds. Additionally, PISP implementations are accessible to smaller FinTechs and financial institutions, removing roadblocks to innovation and increasing customer choice. 

The future of payment initiation functionality 

As we have observed in India’s UPI, PISP functionality is a game-changer, especially for small financial institutions and rural communities. However, one of its shortcomings is that it does not solve the “merchant request to pay” or “payee initiated payment” use cases. At ModusBox, we are focussing our PISP innovation efforts to address this large need currently unmet by FinTech providers.

If you would like to learn more about PISPs and 3PPI functionality, download Google’s whitepaper, Design principles for Third-party Initiation in Real-time Payment Systems. Or, we’re always up for having a conversation. Leave a comment below or contact a member of our team today.

Leave a comment