2019 was anticipated to be the year that open banking took off, with the introduction of a number of new regulations designed to make it easier for consumers to access a greater array of financial services, while improving security.
However, a number of hurdles have meant that Payment Services Directive (PSD2) regulations have so far failed to deliver on some of their promises.
Looking back at 2019 and forward to 2020, Verdict heard from some of those at the heart of the financial industry on how the future of open banking can benefit fintechs, banks and consumers.
Obstacles created through missed deadlines
Although the PSD2 directive – a regulation designed to allow third parties to access customer data through application programming interfaces (APIs) and also bring in stricter security to reduce fraud – first came into force in 2018, 2019 has seen several key deadlines in its implementation.
Banks had until March 2019 to establish a “sandbox” environment that third party providers could access and use to test products. However, according to open banking platform Tink, 41% of the 442 European banks surveyed failed to meet the deadline.
They had until June this year to make their production APIs available to third parties to help them build services for consumers. However, Tink found that none of the 69% of European banks who complied by the deadline provided APIs “of sufficient quality to have met the required regulatory standards for integration”.
The second deadline was for Strong Customer Authentication (SCA). This regulation is designed to better protect consumers against fraud by requiring banks to ask for three layers of authentication, such as PIN codes or biometrics, before a payment can be made. Although the original deadline was in September, banks were given an 18-month extension.
This failure to meet key PSD2 deadlines demonstrates the challenges that the introduction of open banking has faced, with many criticising banks for not being proactive enough in meeting deadlines, threatening to stifle innovation.
Ralf Ohlhausen, executive advisor and European TPP Association vice-chairman believes that progress has been slow due to banks only complying with minimum requirements. Speaking at a roundtable hosted by PPRO he said:
“We spent all of 2018 negotiating with the banks about, what is the right requirements…The banks, surprise, surprise, implemented all those which were explicitly required and they had to do, and they did not implement any one of those which were not explicitly legally required. Now, in our mind, they’re still legally required, because their absence creates obstacles, which is also another clause in the RTS.”
The groundwork needs to be completed before the innovation can start
According to The State of Open Banking 2019, a report published earlier this year by 24% of banks and 29% of fintechs confirmed that they are ready to comply with PSD2.
Jack Wilson, head of policy and regulatory affairs at TrueLayer, believes that this has stalled innovation in the fintech sphere:
“Leaning on what I could see from my regulatory position, the FCA had 90 plus firms come through its registration process to become third party providers, so you could see this excitement around the opportunities of PSD2 and they’re all there ready to make a play, especially in the data space, but then you’ve got this kind of lurch because there’s so much movement needed to be done by the banks to actually roll out the infrastructure that these TPPs can use… it’s not available because that bank hasn’t yet connected into the infrastructure. So, there’s the willingness and the excitement and the start of the innovation but the groundwork needs to be completed before the innovation can start whirring really quickly.”
“We’re still very much at the early offset”
Looking to 2020, what can be done to correct some of the shortcomings of 2019, and ensure that innovation is not stifled?
According to research by PWC and the Open Data Institute only 18% of consumers are currently aware of how open banking could affect them, but this is expected to increase significantly to 64% by 2022.
James Booth, head of partnerships for Europe and Eastern Africa at financial institution PPRO, believes that although open banking has potential, it has not yet lived up to it, partially due to a lack of widespread awareness:
“I still believe there’s a lot of potential in open banking and where we’re taking it, but we’re still very much at the early offset, we’re still debating about how it’s going to look, how a lot of it is going to take to market. From my point of view we’re only 50% there because there’s a whole going to market plan, there’s the whole branding side of it from specific partners, there’s no consumer interest in any of these products because as mentioned the majority of the consumers don’t know about open banking, they don’t know about any of the benefits. And without the consumer side demanding some of these products it’s going to be very hard to get uptake and get any attraction behind it.”
Ohlhausen believes that greater education is needed, with fears over data sharing deterring some consumers from fully engaging with open banking:
“I think people are more scared about sharing their transaction and banking data than they are about sharing their medical data, when asked the direct question, do you want to share your data. But, if it’s packaged up in, do you want this product, this is what you need to do to get it, it would be a completely different question.”
“You need to incentivise the banks”
As well as educating consumers about how open banking could help them unlock new financial services and manage their money in a more innovative way, it is also important to educate financial incumbents on the ways they can also benefit.
According to The State of Open Banking 2019, “risk averse culture” was a major barrier for many traditional banks embracing open banking.
However, many banks can in fact benefit from the technological advancements open banking may bring, and may have to do so if they are to prevent customers from moving over to tech-savvy competitors.
Tom Catchpole, Open Banking Lead at Account Technologies, believes that as well as compliance through regulations, it is also important to highlight what traditional banks can gain from engaging with open banking:
“You need to incentivise the banks to make a success of it. The FCA stick, or the CMA stick, incentivises so far, but I then think we need to look at how we incentivise through greed, essentially, how they could actually earn money for it.”
Wilson explains that this should help prevent some of the “cliff-edge” scenarios that have occurred this year:
“The FCA saw the panic that the fourteenth of September cliff-edge was creating amongst TPPs, who hadn’t necessarily finished their migration to APIs, and also banks who hadn’t necessarily, although they should have built their APIs and put them live. So, they’ve got this six month adjustment period that runs up to the fourteenth of March. But, if, again, TPPs leave migration to the fourteenth of March and banks leave finishing their APIs to the fourteenth of March, then we’ve got another cliff-edge.
Unlocking the potential of data
Ohlhausen believes that ultimately, open banking and PSD2 have the potential to allow customers to unlock significant benefits from their own data:
“They think their data is now being exploited by the big techs, while they cannot do it the other way around. However, I would argue that, based on GDPR, we already have the mechanism in place to also access the big tech data… If I want to switch my car insurance and I have this comparison site which asks me to fill in all the data about my car, and at the end of the form, after half an hour, I make a suggestion and then it shows me which other insurance I could use and I could save money.
“All that, I could avoid, by just giving my car insurance access credentials to that service, to pull out the data from my car insurance and do that for me. Or my telecoms, my electricity. All that data that I have buried somewhere should be made available”