Open Banking and PSD2 - Giving the Power back to YOU!

If you rewind back a couple of years when we were hit by the financial crisis, banks were at the centre stage and had to be savaged by their respective governments. All the authorities, as well as the public, had the same question ‘why are the banks too big to fail’? It is this that triggered the regulators across Europe to bring in more and more stringent regulations and become innovative in how to ‘control’ or in other words, ‘break’ these monster institutions. As a result, the CMA (Competition Markets Authority) in the UK started investigating how to (1) increase more competition for the banks (2) bring more innovation to the industry (3) regulate the emergence of new financial technology firms (also known as Fintechs). This led to the emergence of the Open Banking regulation also known as the CMA9 order.  

CMA’s peers across the channel, The European Regulators, were also thinking on the same lines and were in the process of carving out the second sequel of the Payment Services Directive popularly known as the PSD2 regulation with the same objectives as highlighted by the CMA. Additionally, they also want to introduce Secure Customer Authentication. The Banking Fintechs were termed by EU Regulators as Third Party Providers (TPPs) and were broadly categorised as (1) AISP - Account Information Service Providers and (2) PISP – Payment Information Services Providers.

So what really is an AISP? Let’s suppose you are a retail customer who, for various reasons, holds multiple accounts with multiple banks (e.g. , Lloyds, HSBC, Barclays). Today, when you want to check your financial position online, you have to log into each banks website to check your balances and view your transactions. Imagine if you could go to a single website, just choose the accounts you want to view from various banks and get a single, consolidated view of all your transactions and balances without sharing your credentials!! Wouldn’t you like that? I definitely would!

Now let’s look at what a PISP is. Today, to initiate a payment or transfer funds from your account online, you would need to log into your banks online banking portal and then input the account details of the person/company you want to pay. Imagine, if Facebook were to become a TPP and offer PISP (payment initiation) services. You could pay your friends (Pay a Person) for last night’s meal while still staying on the Facebook app without having to go to your online banking portal. Again, all this, without sharing your banking credentials with anyone. Doesn’t this sound exciting? You could also use these to pay your bills (Bill pay) or even buy goods online (e-commerce)

How does this all work? While CMA and PSD2 both require banks to open up services to TPP’s, they stop short of suggesting how this is to be implemented. However, the industry solution to all this is API. The use of API’s is not new. These have been widely used across various organisations including FCA on their ‘How to find us’ page whereby their location is depicted using Google maps API’s.

So, this makes things simple for the customer and far more convenient then why are the banks worried? Surely, it is in the banks interest to offer any service which makes it convenient for its customers to use. Well, while this does make things convenient and easier for the customers, the banks are at the loosing end here (a) because they are loosing control of the data that only they have been privy to (b) they are loosing the direct relationship with the customer and moving to being a back end utility provider than being the ‘front face’ for customers banking needs.

While there is an increased convenience for the customers, why we, as customers are worried as well? Despite the recent negative media attention (post 2009 crisis), Banks are the still most trusted organisations when it comes to financial transactions and data handling. Why would I as a customer share this data with anyone else besides my bank? Why would I want to share my banking details with a third party unless it’s another bank? Why would I use a third party to initiate payments for me?

The answer lies in the incentives and the benefits the customers can reap by making this data available or when making a payment. To take an example, say if you are looking for a good current account currently you can only choose based on certain criteria e.g. best overdraft rates, best interest paying, etc. If you were to share your transactions with a TPP they could analyse your data and suggest what kind of account suits your needs and in the future, maybe even switch your account for you using the Current Account Switching Service (CASS).  

As a Corporate customer or a Small Medium Enterprise, you are probably already used to these services like account consolidation. However, there are some benefits for you as well! For example, Better integration of your accounting packages through these API’s to your bank to enable swift/smoother payments initiation.

While the service is due to be launched in Jan 2018, the functionality expected to be available is very limited for example, you can only initiate Faster Payments through a UK Bank. The uptake, similar to Faster Payments scheme launch in 2008, is expected to be low, gradually increasing over the years. The uptake will also depend on how many TPP’s choose to register their interests when the registration opens on the 13th of October 2017. While the initial uptake may be slow, Open Banking does have the potential to completely change the way we do banking by giving the control over our own data back to us (the consumers/customers) and is certainly the dawn of a new era!

Disclaimer: the views expressed in this article are completely my own and do not reflect my employers views