The majority of attention generated by the Payment Services Directive 2 (PSD2) to date has focussed on the Strong Consumer Authentication (SCA) requirement designed to secure online payments. A detailed analysis of SCA and its impact on the payments industry can be found in Jonathan Kriegel’s blog PSD2 SCA to Improve Online Payment Protection.
Yet the new regulation actually has many different purposes. Most notably, it aims to integrate the internal market for electronic payments within the EU by encouraging banks and other financial institutions to share their data with third party payment service companies. That in turn, should help to foster greater competition and innovation within the financial services market which will ultimately benefit consumers with a broader range of products and potentially lower processing fees.
Foundation for Open Banking
PSD2 changes the financial services ecosystem by opening up the banking market to third party payment services providers (TPPs) which operate outside the banks though they may be involved in bank customer transactions. Underpinned by the PSD2 in Europe, this form of Open Banking is also being applied to other regions of the world.
And while there is no formal policy for Open Banking in most of Asia, countries like Singapore, Japan, India and Hong Kong are prioritising the approach. The Monetary Authority of Singapore (MAS) has been encouraging banks to adopt application programming interfaces (APIs) since 2016 for example. Having first developed an API playbook for the financial industry it then launched API Exchange (APIX) in 2018, an early cross border open architecture platform which lets banks and fintechs connect and collaborate on the design and implementation of new financial products and services through those APIs.
The situation is equally mixed in Latin America where some countries have made great strides towards open banking and others have remained largely static. Mexico’s 2018 Fintech Law provided a regulatory framework around open APIs similar to that in Singapore for example, while Brazil is now entering the third stage of a phased approach (which involves the instant payment system Pix) that will be completed by phase 4 in September 2022.
Reports suggest that Colombia[i] and Chile[ii] will soon follow suit with regulatory frameworks of their own. North America continues to lag behind however. The US and Canada having to date gone no further than various consultation processes though the situation may soon change after the Biden administration urged the Consumer Financial Protection Bureau to introduce formal Open Banking regulations.
Innovative financial apps will emerge
In its Thematic Research report covering Online Payments published in October this year, data analytics firm GlobalData highlighted the role of open banking in a “major paradigm shift” within the financial services industry that will give TPPs limited, authorised access to the financial data that banks hold on their customers via APIs. That will provide companies with better insight into customer behaviours and preferences which they can use to develop new solutions and meet consumer requirements and expectations.
Long term commercial opportunities which support closer integration with instant payment services are expected to emerge for example, whether through established brands and players like PayPal or a generation of new providers offering easier bank transfer payments on regular bills or merchants with simpler checkout processes within their online checkouts.
Perhaps more significantly the move to Open Banking should also pave the way for account to account (A2A) payments in which funds are transferred directly from a consumer’s account to a merchant’s account via emails, links or QR codes. All would rely on APIs that allow banks to directly exchange funds with each other, bypassing the need to use card scheme networks as intermediaries and eliminating their processing fees from the transaction. Users would also need to use either a smartphone app or access their bank account online to take advantage of A2A, with digital or electronic wallets (eWallets) expected to play an increasingly central role.
Open Banking will also go a long way to personalising finance by giving consumers a detailed overview of the payment options and financial services available to them alongside a view of their transaction histories.[iii] This will include providing a list of the banks and other financial services that they can sign up to, using artificial intelligence (AI) and machine learning (ML) based analytics to customise offers based on historical data, and allowing apps to gather and display information from multiple bank accounts within a single interface or dashboard for example.
Singapore has already provided an example of how this can work with the Singapore Financial Data Exchange (SFFinDex) launched in November 2020. Its use of data aggregation allows consumers to access information pertaining to deposits, credit cards, loans and investments from participating banks alongside data such as HDB homebuyer loans and Central Provident Fund (CPF) pension balances from government agencies.[iv] The service is just one of many similar propositions now expected to launch in different regions of the world, including Europe and the UK after the PSD2 becomes mandatory in March 2022.
[i] Open Banking Exchange to launch Colombian Open Finance program, Fintech & Finance News, 5th August 2021
[ii] Chile’s govt sending fintech bill to congress, BNAmericas, 4th September 2021
[iii] How Open Banking will Transform the Payments Industry, ReadWrite, 19th November 2021
[iv] Leading industry figures discuss Open Banking in Singapore, The Paypers, 24th November 2021