Mike Woods, co-founder Konsentus, argues that we are just at the start of the “Open” journey and that the financial services industry landscape will never look the same again.
Early market estimates, following the enactment of PSD2 Open Banking (access to accounts), suggest that only 30% of financial institutions (ASPSPs) have implemented dedicated interfaces, so there is undoubtedly a long way to go before the whole of the industry complies with the regulation.
However, we are starting to see a shift in the market suggesting this may not last long. At Konsentus, our Third-Party Provider (TPP) Tracker, highlights that those who believe there are only currently a few regulated TPPs active within the market are mis-guided. As the Konsentus tracker shows, every country within the EEA, whether regulated locally or not, has TPPs approved to operate in those countries.
It is true to say today that the number of Open Banking transactions is low and most ASPSPs have implemented manual processes for TPP identity verification and authorisation checking, however, this manual checking is unsustainable as volumes of Open Banking transactions increase.
January 2018 saw the implementation of UK Open Banking. Nine of the largest banks in the UK were enforced under the “Competitions & Markets Authority (CMA) Order” to implement Open Banking APIs. From zero regulated TPPs in January 2018, there are now over 110 regulated TPPs within the UK authorised to provide services, with an additional 41 having the right to passport-in their services.
In January 2018, there were zero Open Banking API calls. As at October 2019, there were 138.5 million transactions in the month with this number predicted to exponentially increase as more and more people utilise Open Banking services.
Therefore, the UK market should be viewed as a barometer for what we expect to follow in Open Banking across Europe. Whereas today there are little/low transaction volumes within Europe, it’s easy to see how these numbers are going to significantly increase in 2020 onwards. More TPPs are going to seek authorisation driving a greater Open Banking transaction volume.
What does this mean for ASPSPs? Firstly, they will each need to ensure compliance with the regulation by providing a PSD2 Open Banking dedicated interface.
Need for automation
Secondly, they will each need to automate their Open Banking processes as transaction volumes significantly increase. Manual processes may currently be sufficient to meet the demands of the market however, this will become unsustainable when the increase in Open Banking transaction volumes anticipated next year become a reality.
Third Party Provider Identity & Regulatory authorisation checking are fundamental pillars to the security of Open Banking. ASPSPs need to ensure that only regulated TPPs, with the customers’ explicit consent, are given access to consumers’ accounts and that data is shared in a controlled and proportionate manner. ASPSPs have the legal obligation to ensure the protection and safety of their Payment Service Users (PSUs) – their data and funds, as well as ensuring protection of their brand and market standing.
The concept of Open Banking, the framework, processes and procedures are merely the start of a bigger journey. Already within the United Kingdom, no doubt followed by the wider European market, the concept of Open Finance is being discussed and debated.
Open Finance will expand the Open Banking ecosystem to include other regulated financial services currently not part of the ecosystem. It is only a matter of time before PSUs have the right to provide account access and share information with a variety of regulated service providers including banks, pensions, insurance, investment and wealth management amongst others.
We are just at the start of the “Open” journey and the financial services industry landscape will never look the same again.