It’s likely that you’ve heard the term ‘open banking’ in recent months. Similar to blockchain, open banking has become the United Kingdom’s latest buzzword, with many jumping on the hype but not truly understanding what it entails.
Since the UK has been implementing open banking in the last couple of years, many of the UK’s major banks have started this process much sooner than their European Union counterparts. However, with the new open banking European Directive, PSD2 (Revised Payment Service Directive) coming on March 14th, the pressure will be on beyond Britain.
As described by Viola Hellström, Vice President of Communications at Evry, PSD2 “enables bank customers, both consumers and businesses, to use third-party providers to manage their finances”. With over 9,000 financial institutions in Europe, PSD2 will undoubtedly create an overhaul in the market.
The challenges of open banking
However, when it comes to taking the first steps to implement open banking, there is a hugely complicated process to undertake.
Organisations first require approval from the Financial Conduct Authority (FCA), which is a long-winded process that can take 6-12 months. Unsurprisingly, this is a lot of work and is very costly for small companies. These organisations must work with lawyers and a range of consultancies, and are unable to get started with the open banking process until their organisation has received the green light.
With the new PSD2 directive, EU banks and financial institutions must open their internal data and functionality to EU companies and anyone on the market who is authorised to use this service. Like GDPR, those who do not comply with the new regulation will face considerable fines.
There are also cybersecurity risks that come with open banking. In an industry that holds some of the most sensitive customer data, those who implement open banking should have military grade security, or else, a single breach will likely have catastrophic effects.
So, if the process is challenging, why do organisations implement open banking?
The open banking opportunity
Open banking opens the market to smaller players in the financial services and banking industry. By introducing competition into the market, customers will have increased choice and will no longer need to accept using the big players just because they are recognised names.
Accessibility and ease of use also improves with open banking. In the modern world, successful products and services are driven by customers and not dictated by companies as they were in the past. Open banking brings open competition onto the financial services market and by doing it, it enables new, small and agile players to deliver a customer-first approach.
If the traditional banks and financial service providers don’t evolve and modernise to address the new game rules on the market, then, as outlined in Verdict those who “adopt a compliance-only approach risk losing customers and being downgraded to the status of commodities”.
Accelerating the journey
So, will organisations around Europe be ready by the 14th March deadline? Many have questioned the preparedness of financial institutions, given the lack of companies currently offering solutions.
Alongside the difficulty of implementing open banking, for small businesses, sourcing the right talent to build a secure open banking infrastructure can be difficult. This is only intensified by the current skills shortage in the IT and technology industry in the UK. And, when new and innovative technology like open banking is introduced, there are even less people who are well-equipped or experienced enough to create and manage the implementation process.
Open banking “creates the opportunity to develop an entirely new market for financial products”, as Christian Ball, Head of Banking for GFT, previously told Finextra. However, this new market needs experts to build it. With the speed that the open banking market is growing, it’s important for organisations to have teams with the right expertise and knowledge, or they risk project failure and regulatory non-compliance.
The future of open banking: what’s next?
As open banking extends into Europe, it’s likely that we’ll see major players in the open banking market start to emerge. Some European companies will take the UK model as inspiration or as their official framework, whereas others will create local initiatives and models.
Brexit will also play a big part in the next few years, with changes to the UK’s financial industry and regulations impacting the progression of open banking, adding to the complexities of implementation.
With open banking empowering small businesses to challenge larger players in the market, and new EU regulations opening up the technology into new regions, it’s an exciting initiative which will drive huge changes in the way consumers and banks interact.
Open banking might be a daunting process, but the benefits to both financial institutions and consumers outweigh the challenges.
With the right talent and technology in place, the months it takes to implement open banking can be considerably reduced, and organisations will have peace of mind that they are complying with the imminent PSD2 directive.