PSD2 – the key to unlocking compelling customer offers and wider industry collaboration

Last month, the EU published in its Official Journal the final Regulatory Technical Standards (RTS) for the PSD2 Directive, which aims to protect consumers while encouraging innovation and competition in the financial sector. The regulation mandates in particular Financial Institutions to open, under the end-user’s consent, access to payment accounts to Third-Party Providers (TPPs) through secure interfaces. The standards will come into effect on September 14th 2019, although banks’ APIs could be audited by regulators and tested by TPPs as early as March 2019.

This new payment legislation is a real game changer for the financial ecosystem, driving the implementation of state-of-the-art data sharing technologies, unlocking new use cases and enabling seamless user experiences.

By, Emilie Casteran, Head of Digital Strategy, Banking & Payments at Gemalto.

Now the Directive has been confirmed, the clock is ticking for banks to define their Open API strategy. Some Financial institutions only target to meet the minimum requirements of PSD2 that include exposing Account Information and Payment Initiation APIs. Others see Open Banking as an array of business opportunities including data monetization, co-innovation and building a fintech partners ecosystem. The interfaces exposed by banks will differ based on their strategic considerations. Pioneers like BBVA, Credit Agricole or American Express have proactively launched developer portals long before PSD2 regulatory deadline and offer a rich set of interfaces to access user accounts, product information or utilities for merchants.

New possibilities for consumers and businesses  

As a user-centric regulation, PSD2 should lead to an improved customer environment, bringing benefits not only to end-users but ultimately to all banking and payment parties. It hinges on a critical connection between banks, fintechs and retailers – a relationship powered by Open Banking.

As a growing trend over the last two years, Open Banking allows other businesses to access a customer’s financial data with the individual’s consent and to offer a broad range of banking services. There’s already a lot of enthusiasm in Europe around it, like the Nordics where open APIs have been used for at least three years now and have been very proactive in explaining and interacting with consumers about Open Banking by sending out communication and using various channels to spread information. Some fintechs have already launched such services using web scraping technology and have encountered great popular success. Bankin’, a Personal Finance Management application available in France and 3 other markets has surpassed the 2 million users milestone. On the payment side 20 million consumers have already used Sofort, the leading German P2B scheme based on account transfers and now offered by over 35,000 merchants.

However, there’s still widespread confusion and apathy from certain parts of the population. For example, in the UK recent research has found that two-thirds of consumers won’t share their financial data with third-party providers, and that over half say they’ll “never change their existing banking habits and adopt open banking”. A separate survey from Which? found that 92% of the public hasn’t even heard of it.

Open Banking promises numerous benefits to consumers and businesses and lays the groundwork for stronger collaboration and better interoperability between traditional financial institutions and innovators in the financial space. Here we outline four potential applications for both consumers and businesses that PSD2 and Open Banking could enable:

  • New payment experiences at retail: When paying for something in store or online with a credit card, strong authentication processes (PIN numbers, security codes, 3D secure checks etc.) must be put in place to protect the user’s Primary Account Number. When accepting card payments, merchants also incur small costs to process them. Open Banking could allow them to become TPPs and make direct transfers to take payments, rather than using a debit or credit card. This could lead to retailers designing new payment experiences via smartphone apps, secured with biometrics, and even incorporating rewards and incentives directly on to these, based on what it knows about a customer’s purchasing history. This removes card payment processing fees for the retailer while providing an incredibly easy omni-channel process for the consumer.
  • Finance dashboards – for consumers and businesses: Open Banking will allow third parties to become Account Information Service Providers (AISPs), with the ability to aggregate information from all an individual’s accounts; even when they’re from different banks. For consumers, this will help them plan and manage their finances more effectively and businesses will save time and costs through the accounting or tax management software’s ability to use APIs to access all relevant accounts and manage reconciliations.
  • Better service through transaction analysis: APIs from AISPs could give businesses valuable insights into transactional patterns and allow them to take advantage of this. Consumers could authorise an app to analyse their transactions and consumption habits in return for offers or personalised service. For example, a restaurant would be able to analyse where and when its customers like to visit and use that data to incentivise customers to visit in traditionally less busy times, making the concept of happy hour real-time.
  • Easier, more secure P2P payments: Before Open Banking, P2P payment apps which were not operated by banks typically relied on screen scraping and required users to share their bank login details – in many cases contravening most banks’ terms and conditions which forbid sharing such information. With Open Banking, APIs will provide a much more secure method for new TPPs to offer P2P payments, opening the door to more possibilities, such as one day making payments securely to friends at no cost through popular messaging apps alike WhatsApp.

PSD2, together with Open Banking, is set to open up an array of innovative and valuable new services for both businesses and consumers, but it requires all stakeholders – regulators, financial institutions and FinTechs to clearly communicate towards customers. While it may take time for changes to come into effect, we’re likely to see exciting developments within the next year. And now that the RTS are approved, banks have no excuse to not start getting ready.

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