Open Banking and PSD2: What to Expect Next?
By Joshua Townson, Policy and Membership Associate, Innovate Finance
The demand for better, more personal digital experiences in the financial industry is widely recognised as an achievable aim of European and UK regulatory initiatives to encourage innovation and digitalisation in the traditional banking industry.
Europe’s second Payment Service Directive (PSD2) and the UK-led Open Banking initiatives have undoubtedly had enormous potential to revolutionise the way in which we interact with our financial data. Over a year and a half since it’s launch, Open Banking has already seen authorised FinTech Third Party Providers (TPPs) generate new insights about our savings patterns, while also creating opportunities for more tailored financial advice and money-management services.
“Yapily empower the end user – whether that is a consumer, an SME or a corporate – through our customers to take control of their financial data through a single API for all the banks under Open Banking.” – Matt Cockayne, Chief Commercial Officer, Yapily
To recap, Open Banking requires the nine major banks in the UK, also referred to as the CMA9, to provide their personal and business customers with the ability to access and share their account data on an ongoing basis. As part of this process, authorised TPPs can retrieve a customer’s financial information and data directly from the bank through Application Programme Interfaces (APIs) and create newer, more personal services for end-users.
However, the recent deadlines for Strong Customer Authentication (SCA) and Secure Open Standards of Communication (SCS) under PSD2 serve as a reminder of the challenges – or some say reluctance – presented to many banks in overhauling their legacy systems. The decision of PSD2 to leave technical details of APIs open to the market to define may also result in a rushed attempt at the expense of truly innovative premium APIs.
The new PSD2 legislation will also unintentionally block access to non-payments data such as savings accounts and loan accounts. Many FinTech companies have also reported the need to go through an arduous process of customer re-authentication, often costly and time-consuming.
“CreditLadder delivers a stable rent reporting service for our users but the new 90-day re-consent period will cause disruption to our service. We would welcome longer consent periods that people could self-select rather than imposed limits.” – Sheraz Dar, CEO, CreditLadder
The Financial Conduct Authority’s (FCA) recent decision on an 18-month deferment for e-commerce SCA transactions and a six-month delay on blocking screen-scraping will surely be welcomed by many in the industry looking for a longer adjustment period. Ultimately, it also serves as a reminder of the willingness of UK regulators to be flexible in working with industry in understanding and supporting FinTech innovation.
Alongside the FCA, the leadership and coordination of the Open Banking Implementation Entity (OBIE) – the company set up by the CMA in 2016 to deliver Open Banking – will continue to drive and support much-needed domestic standards. With no equivalent body in the rest of the EU, the OBIE is unique and will continue to monitor and react accordingly to the progress of Open Banking in the UK. In particular, the API standards and trust framework for Open Banking have been highly praised and looked to as a blueprint for similar international projects.
“At Revolut, we have what we think is a unique position: we want to not only meet our minimum obligations under PSD2, but to allow both third party providers and our customers to integrate with our platform and automate their processes as much as possible while providing maximum value at each step.” – Joshua Fernandes, Product Owner, Open Banking at Revolut
Brexit will have little effect on UK compliance with PSD2 given it applies to the European Economic Area (EEA) and its necessity for future interactions with the European financial sector. The evolution of finance and technology generally means that banks will need to further engage with Open Banking and form FinTech partnerships over the next year and the balance struck between banks, attempting to move away from legacy systems, and new FinTech entrants will be significant against the backdrop of new regulations and procedures.
Beyond this, innovative payment solutions and potentially new services are on the horizon to take advantage of the fact that the underlying payment processing will be real-time. These new overlay mechanisms will build on the real-time payment infrastructures, meaning that merchants will receive funds faster with processing fees reduced. This is something that we will see over the coming months, along with an increase in the rhetoric in moving Open Banking into Open Finance.
However, before we can truly explore the benefits of driving competition across a range of financial products, a balance between FinTechs, banks and new regulations needs to be struck. This is already happening – widespread support from industry, policy-makers, and bodies like the OBIE will ensure that the UK continues to lead the way in terms of API development and opportunities for FinTech TPPs and end-users alike. The focus is then on how we adapt it across a wider range of financial products and services.