Whilst initially seen as simply a regulation exercise, the second Payment Service Directive, also known as PSD2, has been a key driving force behind Open Banking, an initiative that presents a hopeful vision for future years of the financial services sector. Thanks to the advancement of technology, the payments market is currently seeing disruption to legacy banking systems, along with a move towards a world of Open Data. With Open Banking, third-party providers (TPPs) can provide customers a wealth of new and automatic services beyond their standard bank offerings, such as what products to purchase or even advice on who to bank with.
PSD2 has been created to ensure that banks create mechanisms to allow third-party providers (TPPs) to work securely, reliably and rapidly with the bank's services and data with respect to and with the consent of their customers. PSD2 requires EU member banks to provide authorised, i.e. licensed TPPs, access to customers' accounts either via Application Programme Interfaces (APIs) or their user interfaces. It also mandates the use of Strong Customer Authentication (SCA), which requires multiple factors of authentication from a customer to initiate electronic payments and grant access to transaction data.
Despite the progress of PSD2, however, there are still challenges to overcome to achieve widespread adoption and to meet Open Banking objectives. So, do you know the current roadblocks that European banks and financial services need to overcome to make Open Banking a beneficial reality for all?
Delays to API development
A crucial factor standing in the way of the acceleration towards Open Banking continues to be the delay to API development. These APIs would be the technology that TPPs rely on to migrate their services and customer base to remain PSD2 compliant.
One of the contributing factors was that the RTS, which apply to PSD2, left room for a lot of different interpretations. This ambiguity caused banks to slide behind and delay the creation of their APIs. This delay hindered European TPPs in migrating their professional services without losing their subscriber base, particularly outside the UK, where there has been no regulatory extension and where the API framework is the least advanced.
A lack of awareness
Levels of awareness of the new regulations and changes to how customers access accounts and make online payments are extremely low among consumers and merchants. This leads to confusion and distrust of the authentication process in advance of the SCA roll-out. Moreover, because the majority of customers don't know about Open Banking yet, they aren't aware of the benefits. Without customer awareness and demand it might be very hard for TPPs to generate interest and uptake for their products.
Recently some regulators and banks, such as the Central Bank of Ireland, make decent efforts to raise understanding of the changes with PSD2 campaigns. But it isn't reaching the general public. If this does, it's often because of scaremongering or fear, uncertainty and doubts around data security fuelled by incumbents to safeguard their business. This also isn't right way to approach the problem as it will lead to people being more afraid, rather than aware. Instead, it is the role of payment providers to educate their customers about Open Banking requests or opportunities, to guarantee the public are aware of the changes to payment authentication procedures when SCA is necessary and are empowered to move their data.
TPPs possess a real vested interest in getting customers on board with Open Banking. They ought to build on their customer relationships to develop trust and raise levels of education round the changes. When customers subscribe to a new service, TPPs need to let them know explicitly what to expect before they have to do it, plus what explicit consent is required to access their account information in exchange for value-added services.
Outweighing the challenges with opportunities
Although the development of the PSD2 regulation hasn't been seamless for that banking and fintech industry, it's set to offer many benefits and advantages for the end-customer, and the financial industry. Actually, the regulation will create an integrated and frictionless European payments system, which will provide the customer with more choice, control and security over their finances than ever before.
One of PSD2's primary goals is to provide greater protection against fraud for banking customers, who may have previously been open to risk through weak authentication and unregulated data-sharing practices. The new rules insist on enhanced security requirements, including the use of Strong Customer Authentication (SCA) to protect customers while making electronic payments.
Furthermore, TPPs unencumbered by legacy technology have long been able to innovate faster than traditional banks. Now, this regulation will provide regulated and secure use of customer data, allowing them to develop products quite a bit faster. The new regulation also promotes technology on a European level and encourages fintechs to do what they do best: innovate.
It’s important too to not forget that PSD2 regulation increases market competition allowing customers to choose a wider range of suppliers for their banking and payment services without needing to switch their bank for that. The decoupling of banking services from the underlying account infrastructure can make it easier for customers to opt for the banking services that best fit their demands. It also increases the number of financial providers, services and products which customers will be able to select from.
The future of Open Banking
The financial services landscape is becoming a firmly consumer-centric environment. Over the UK and Europe, we'll still see the rollout of technologies that put control at the disposal of consumers. Open Banking is going to be pivotal in its role, opening new avenues and opportunities for banks and payment providers (PSPs).
Thanks to Open Banking, the ability to share information securely in the retail banking sector has resulted in a sophisticated ecosystem where the customer is in charge of their payments and choice of banking services. Within the next decade, we should expect to see the same level of transformation in our digital services and data sharing, resulting in a complete rebalance of services where customers can actively own their data and employ it the way they like.
Europe is currently leading outdoors Banking race, so the successful implementation of PSD2 and SCA is extremely important to maintain the lead and build the next with Open Finance and Open Data as well.