New regulation in Europe and the UK has the potential to transform the face of financial services. Treasury Today finds out what the future might look like under PSD2 and open banking and what it all means for treasurers.
“A decade from now the banking environment will be unrecognisable,” says Jonathan Turner, Partner, Financial Services at PwC, when asked what impact open banking will have on Europe’s financial sector.
This is because the new rules, brought in by the European Union’s Payment Service Directive 2 (PSD2) and the UK Competition and Markets Authority’s (CMA) Open Banking initiative, is forcing banks to open up their IT infrastructures through application programme interfaces (APIs) to a host of regulated third parties – including their competitors. This may give rise to new business models and offer banks the opportunity to connect with the wider financial ecosystem and offer a host of innovative services to their clients.
Turner illustrates this point using the analogy of smart TVs. “When internet-enabled TVs first launched, some manufacturers allowed only one or two third parties to access them and provide services such as movie streaming,” he says. “In many cases, these services eventually stopped working and many users were left with TVs that offered limited internet-enabled services.”
However, as Turner explains, others allowed third parties to build and offer services through open APIs. Owners of these TVs were therefore able to access a variety of constantly evolving online services. Today, this is what most TV manufacturers offer.
“If you think about this in the context of banks, then I foresee there being some banks that attempt to continue operating much in the same way they have today,” says Turner. “These will focus on innovating in-house and using their balance sheets to consume any competition.”
“Then there will be those banks that actively encourage third parties to interact with their services through open APIs. It will be the latter that capture the imagination of customers and win the day, I believe.”
Open banking in brief
Before exploring the impact that open banking will have on financial services, it is worth looking at what is behind the two key regulations driving it: PSD2 and the CMA’s Open Banking initiative.
In 2015, the European Commission (EC) announced PSD2 to replace the original Payment Service Directive (PSD). Broadly speaking, PSD2 is intended to reflect the changes that have occurred in the payments industry because of digitisation. The aim is to make the European payments market more integrated, competitive, fair, cheap and efficient. PSD2 also sets out to improve security standards by regulating third-party financial service providers, known as account information service providers (AISPs) and payment initiation service providers (PISPs).
To achieve this, PSD2 has brought in a host of new rules that banks must comply with. The most impactful of these is the Access to Account rule, whereby customers can allow third-party AISPs and PISPs to access account data from their bank or banks through open APIs. The ASIPs and PISPs can then provide customers with a range of new services.
Launched in 2016 following a study of the retail banking landscape in the UK, the UK CMA’s Open Banking initiative is similar. The regulation mandates the UK’s nine largest current account providers to make customer data available to third parties. These third parties, with customer consent, can access this data to offer many different services including payment initiation and account aggregation payments. As in PSD2, this information will be shared through APIs.
State of play
With PSD2 going live in January this year, one of the most contentious issues has been the time taken to finalise and announce the regulatory technical standards (RTS). The RTS provides the rules that outline how banks should share account information, and how third parties can initiate payments under PSD2. These standards were eventually announced in late November 2017, with banks needing to comply by September 2019. In contrast, the standards for the UK’s open banking were confirmed early on.
This delay has frustrated fintechs that have applied to become AISPs or PISPs. “Because it has taken so long for the technical standards to be published, the banks have rightly waited to invest significant sums into their first PSD2 offering,” says James Higgins, Product Director at AccessPay. “This is frustrating for us at AccessPay as we have recently requested to become an AISP. We don’t know what form the information we are requesting will be delivered in, making it hard to develop solutions for our customers.”
Higgins also believes that PSD2 could have been more closely aligned with the developments in the EU’s payments infrastructure. He uses the development of Australia’s New Payments Platform (NPP) as an example of how it could have been done differently. “The NPP contains APIs that will allow a host of third parties to build overlay services using the rich data carried over the payment rails,” he says. “The overall objective is like that of PSD2 – to drive innovation – yet it seems to be happening in a more aligned way, whereas in the EU it is all happening in silos.”
The banks have likewise expressed their frustration about the delay in announcing the RTS standards. There is also some concern about the speed at which PSD2 is being implemented by EU countries into their law, with some countries already announcing that they will miss the deadline. “The goal is standardisation across Europe, but banks, in general, are still struggling to find the most optimal business models for themselves, the third-party providers and most importantly their customers,” says Gunnar Berger, Head of Open Banking at Nordea.
What this means is that come 13th January 2018, the world will not have changed and we will not suddenly be able to access a host of new and exciting financial services, says Marcus Hughes, Director of Business Development, Bottomline Technologies. “In theory, PSD2 will be live, but in practice, the changes that will come with it will not be felt by the end-users of financial services until later,” he says.