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.”
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.
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.
Some institutions are struggling with the burden of regulation. These banks see PSD2 as just one more thing they need to do.
Jonathan Turner, Partner, Financial Services, PwC
One of the most interesting aspects of open banking is the banking community’s response to it. On the one hand, open banking poses a threat to incumbent banks and may see them lose parts of the customer relationships and, in some cases, revenue streams. On the other hand, it also provides banks with an opportunity to boost the products and services that they offer customers, potentially driving customer loyalty and creating new revenue streams.
A 2016 survey by Strategy& found that for the most part, banks in Europe were on the defensive when it came to PSD2 and open banking, with mostly negative perceptions of the new rules. Indeed, the study found that many saw PSD2 as just an exercise in compliance and a driver of cost, rather than an opportunity. Fast-forward a year and PwC’s Turner believes that this remains the case for a handful of banks. “Some institutions are struggling with the burden of regulation,” he says. “These banks see PSD2 as just one more thing they need to do.”
Turner adds that it can be quite easy to tell which banks think that PSD2 is a burden or an opportunity by hearing about the main responsibilities of their Heads of Open Banking. “Some Heads of Open Banking focus solely on compliance,” he says. “Others are focused on vision and creating the bank of the future.”
Despite the reservations banks may have about open banking, many are experimenting in this area. The Strategy& survey found that 44% of banks planned to provide an open bank offering in the next five years. Moreover, 64% said they intended to integrate foreign products or functionalities into own digital offering. Forty-four percent also said they are planning to integrate their own products or functionalities into foreign ecosystems.
Bullish about the open banking phenomenon, Nordea is keen to explore how it can leverage open APIs and work with fintechs to offer new services to its clients. “Nordea sees PSD2 and open banking as an opportunity to offer better services for our customers and to become more agile by partnering up,” says Gunnar Berger, Head of Open Banking at Nordea. “By sharing the development load, we can bring innovative services to market faster. I believe many banks will follow the same approach and work to develop and leverage partnerships with future service providers. Those who lag behind in this area are missing a big opportunity.”
Despite this positive outlook, Nordea is cognisant that change will not happen overnight. “There is still a lot of work we have to continue with within the bank,” says Berger. “We must continue to update our core system. Equally important is changing the culture in the bank to improve how we work with external partners.”
Overall though, Berger is excited about the future. “PSD2, along with changing customer behaviour and general technological developments, will have a big impact on the banking industry across Europe, leading to increased competition,” he says. “We expect that PSD2 will boost innovation and the creation of new services by, or in collaboration with, third parties. This will lead to the emergence of a new payments ecosystem. After a time of maturation, we believe that corporate customers who experience the benefits of open banking will start to demand APIs and openness from their banking partners elsewhere in the world.”
PSD2 and open banking will clearly have a big impact on banks, but what impact will corporate treasurers, as the end users of financial services, see? At this stage, it is hard to say. For one thing, user cases are still developing, or have not yet been thought of. At the same time, the retail space is largely dominating the innovation agenda.
There are signs of what corporates can expect out there in the market, however. One area where treasury will most certainly see an early benefit is through aggregated account visibility. HSBC, for example, recently announced that it would enable UK customers to view their account balances from 21 different banking providers through their online banking platform.
Whilst this is aimed chiefly at retail customers, Bottomline’s Hughes says that one of the most exciting aspects of open banking is that it brings efficient multi-banking to SMEs and middle market corporates. “Currently, only corporates on SWIFT can benefit from efficient multi-banking,” he says. “Open banking and the use of APIs will bring the price of this down, meaning that smaller companies will be able to see up-to-date balances across their accounts in real-time and manage these through one portal.” Hughes is also excited about what can be built on top of this foundation. “On top of multi-banking, solution providers can add sweeping, liquidity management, forecasting and the other value-add applications at a low price point to middle market corporates and SME,” he says.
PwC’s Turner adds that banks might even begin to offer SMEs and middle market corporates non-financial related products because of open banking. “There is no reason a bank could not offer CRM systems through its banking portal,” he says. “In theory, it could even offer these companies a completely outsourced finance function, which is pretty revolutionary.”
It can be useful to look at how APIs, which power open banking, are applied in various countries to see what else corporates might expect from open banking. In India, for example, the government has built a host of advanced API-enabled financial systems that banks can plug into. This has enabled banks to create new and exciting value propositions for their clients.
For example, Citi’s Request to Pay Solution leverages India’s Immediate Payment Service (IMPS) infrastructure and enables consumers to make real-time bank debits from their account using a tokenised address such as an email. For eCommerce companies selling in India, where card penetration is low, this solution opens the door to a much broader range of customers and gives them a low-cost collection method.
In China, the country which has arguably seen the biggest intermediation of financial services from technology companies, banks have been working with companies like Tencent and Alibaba to develop new collection tools for corporates. To provide one example, Standard Chartered has recently collaborated with Tencent’s WeChat Pay to create a one-stop online collection solution for corporates in China. This allows eCommerce companies in China to reach over 800m consumers in China and benefit from improved reconciliation and payment processing.
Whilst it will take time for the new rules mandating open banking in Europe to take hold, these are clearly exciting times and a lot of change is expected over the coming years. It is unlikely that treasurers will need to make any major changes right away. However, by gaining a clearer understanding of their banks’ open banking strategies, treasurers will be able to find out whether their providers are fully embracing the opportunities. And as new and innovative solutions become available in Europe, it will then be up to treasurers to understand how these solutions might add value to their businesses.