Views, thoughts, and opinions expressed in the text belong solely to the author, and do not represent the views of the Support Centre for Data Sharing or the European Commission.
This article is an introduction and is the first part of a series on open banking and data sharing. After researching the topic, I believe open banking is a positive change in the financial services industry as it can potentially provide new business opportunities and improves customer experience as will be explained in this series.
The impact of open banking
Our European society will soon become a cashless and cardless society, a process accelerated by the COVID-19 pandemic, and the financial companies with the right investments and capacity to create the best user experience will out-win the competition. As the virus spreads, most shops in Europe only accept cashless or card-less payments. Financial service providers that offer user-friendly cashless or digital payment options will gain more customers in the post COVID-19 world. The transition to a digitalisation of banking and payments is stimulated by the introduction of open banking. Therefore, financial services providers are pushed to invest more in data-driven decision-making and financial data-sharing. The core aim of open banking is to provide more customer-centric solutions and improve the user-experience.1,2
The basics of open banking
Essentially, open banking has orchestrated the process to open-up services across financial institutions, provides choice and fosters competition and innovation in the market. The term open banking refers to the way in which banks and other financial institutions can make data and services available to authorised service providers or third parties who act on behalf of their customers.3 The open banking initiative is also described in the digital strategy, promoted by the European Commission, as part of the European Digital Economy and Digital Single Market.4
Regulations in open banking
Europe is a pioneer in this space. The first talks and plans for open banking were drafted after the financial crisis in 2008. However, the push for change started when the Competition and Markets Authority (CMA) published a report on the retail’s banking market in 2016 with the finding that that older, larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow and access the market. The United Kingdom started the incentive to push banks to develop policies regarding APIs (Application Programming Interfaces). Open banking has since evolved and has been applied in different formats across the globe.5 The European Banking Authority (EBA) and the CMA in the United Kingdom define Regulatory Technical Standards regarding open banking. Part of the new European legislation is the second Payment Services Directive, or PSD2.6 PSD2 is basically the regulation that sets the standard for banks to release their data in a secure, standardised form. The revised PSD2 Access to Account (XS2A) came into effect in 2018 and provides access to technical interfaces. The PSD2 XS2A is a mandatory regulatory component, under which all institutions that offer payment accounts must offer access to regulated third party providers. In other words, banks will need to open-up new types of services to authorised payment institutions (Payment Initiation Services and Account Information Services).7
Achieving regulatory compliance is not trivial. Institutions must be aware of the PSD2 itself, the technical standards and guidelines published by the EBA, technical concepts around APIs and certificates as well as related regulations (eIDAS and GDPR), national transposition timelines, and national register formats.8
Data-sharing in open banking
In order to share data, financial institutions use APIs. These are a set of routines, protocols, and tools for building software applications. An API specifies how software components should interact. An API provider implements an open API, via an API gateway. An open API is free-to-use, publicly available, and provides developers with programmatic access to a software application. These APIs give access to open data, such as information on ATM and branch locations, product information for personal current accounts, business current accounts, and SME unsecured lending, including commercial credit cards. However, in most of open banking use cases, only read/write APIs are provided, in compliance with the access-to-accounts regulation. These APIs require the customer’s consent, to request account information, such as the transaction history, of personal and business current accounts and/or initiate payments from those accounts. The data provided by read/write APIs includes personal current account and business current account transaction data sets made available by account servicing payment service providers in accordance with the read/write data standard.9
The introduction of open banking has stimulated a change in the financial services industry, with a spike of (FinTech and payment) start-ups and scale-ups such as Adyen, Transferwise, Monzo, Klarna, and N26. This change is good as it limits clustering of the financial services industry, such as the monopoly of big banks, and fosters innovation through diversification. Small and medium sized enterprises and entrepreneurs are stimulated to develop tech solutions (applications, websites, etc.) for our new digitalised society. These new enterprises also have a fresh take on the financial services industry and their business models are revolved around customer experience, which essentially gives all of us a better experience and more freedom in controlling our personal finances.
Interested to learn more about open banking? Stay tuned for more articles on the topic! My next piece will be on the different business models and will be discussed in further detail with illustrative use cases.
In the meantime, please share your opinion on the future of open banking and new business opportunities in the post COVID-19 world. Give your opinion on our forum or share your knowledge on open banking!
- 1. https://www.euromoney.com/article/b17hxflzm0btdb/alipay-offers-some-lessons-on-open-banking
- 2. https://www.forbes.com/sites/alastairjohnson/2018/12/24/beyond-plastic-why-a-cashless-society-should-be-a-cardless-one/#445444c06cf8
- 3. https://www.openbankingeurope.eu/
- 4. https://ec.europa.eu/digital-single-market/en
- 5. https://www2.deloitte.com/global/en/pages/financial-services/articles/open-banking-around-the-world.html
- 6. https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en
- 7. https://www.openbankingeurope.eu/
- 8. https://www.openbankingeurope.eu/
- 9. https://www.openbanking.org.uk/