While initially seen as simply a regulation exercise, PSD2 has been a key driving force behind open banking, an initiative that presents a hopeful vision for the future of financial services. Ralf Ohlhausen, executive advisor at PPRO, writes
Thanks to the advance of technology, the payments industry is seeing disruption to legacy banking systems and a move towards open data.
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With open banking, third-party providers (TPPs) can offer customers a wealth of new and automated services beyond their standard bank offerings, such as what products to buy or even advice on who to bank with.
PSD2 was created to ensure that banks create mechanisms to enable TPPs to work securely, reliably and rapidly with the bank’s services and data on behalf of, and with the consent of, their customers. It requires EU member banks to give licensed TPPs access to customers’ accounts, either via Application Programme Interfaces (APIs) or their user interfaces. It also mandates Strong Customer Authentication (SCA), which requires multiple factors of authentication from a customer to initiate payments and grant access to data.
Despite PSD2’s progress, however, there are still challenges in achieving widespread adoption and meeting open banking’s objectives. A key factor has been the delay to API development. These APIs are what TPPs rely on to migrate services and customers to remain PSD2-compliant.
A contributing factor here was that the Regulatory Technical Standard that applies to PSD2 left room for too many different interpretations, causing banks to slip behind and delay the creation of APIs. This hindered European TPPs in migrating services without losing customers, particularly outside the UK, where there has been no regulatory extension and where the API framework is least advanced.
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By GlobalDataLack of awareness
Levels of awareness of the new regulations and changes to how customers access bank accounts and make online payments are very 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 do not yet know about open banking, they are unaware of its benefits. It may, therefore, be hard for TPPs to generate interest and uptake for their products.
Recently, regulators and banks, such as the Central Bank of Ireland, have made decent efforts to raise awareness of the changes with PSD2 campaigns, but the message is not reaching the public. When it does, it is often through scaremongering or fear, uncertainty and doubts around data security, fuelled by incumbents to protect their business. This will lead to people being more afraid, rather than aware.
It is the role of payment service providers to educate customers about open banking requests or opportunities, to ensure that the public are aware of the changes to payment authentication when SCA comes into play, and are empowered to move their data.
TPPs have a vested interest in getting customers on board with open banking. They should build on their customer relationships to grow trust and raise levels of education around the changes. When customers sign up for a new service, TPPs need to tell them 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.
Although PSD2’s introduction has not been seamless for the banking and fintech industry, it is set to offer benefits and advantages for the end customer and the financial industry. The regulation will create an integrated and frictionless European payments system that will provide the customer with more choice, control and security over their finances.
One of PSD2’s primary goals is to offer 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, including 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 access to customer data, allowing them to develop products even more quickly. The new regulation also promotes technology on a European level and encourages fintechs to do what they do best: innovate.
It is also important to remember that PSD2 increases market competition, allowing customers to choose a wider range of suppliers for banking and payment services without having to switch bank. The decoupling of banking services from the account infrastructure will make it easier for customers to opt for the services that best fit their needs. It also increases the number of financial providers, services and products from which customers will be able to choose.
The financial services landscape is becoming firmly consumer-centric. Across the UK and Europe, we will continue to see new technologies that put control in the hands of consumers. Open banking will be pivotal, opening up avenues and opportunities for both banks and service providers.
Thanks to open banking, the ability to share data securely in the retail banking sector has led to a sophisticated ecosystem where the customer is in charge of their payments and choice of banking services. Over the next decade, we should expect the same level of transformation in digital services and data sharing, leading to a full rebalance of services where customers will be able to actively own their data and use it as they like.
Europe is leading the open banking race, so the successful implementation of PSD2 and SCA is extremely important to maintain the lead, and build a future with open finance and open data as well.
