The European Commission's Revised Payment Services Directive (PSD2) was implemented on 13 January 2018, with little fanfare. However, the ideas that PSD2 seeks to promote look set to change the face of banking, both for service providers and for customers. Amongst other requirements, PSD2 obliges banks to allow authorised Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) access to customer account data, where the customer has given both the bank and the AISP or PISP permission for them to do so.
In the UK, the Open Banking Implementation Entity (OBIE) has developed "Open Banking" independently of implementation of PSD2. However, this system will provide a platform for banks to meet some of their requirements under the regime.
The OBIE is a non-profit organisation which was set-up by the Competition and Markets Agency (CMA) and the biggest nine current account providers to deliver Open Banking within the UK. Its aim is to increase competition and innovation within the banking sector; but what is Open Banking, and what does it mean for financial services businesses?
What is Open Banking?
Open Banking is essentially a UK-based system of technology and rules which facilitates the sharing of customer account data. The initial roll-out of this platform commenced on 13 January 2018 with current account data, and will continue with credit card data being added in the future. Imran Gulemhuseinwala, Trustee of OBIE, said: "This is a major step towards giving the customer real ownership and control of their finances and data."
What do the changes mean?
Third parties will, with the right authorisation and permission, be able to access customer account data and provide services which use that data.
For example, an AISP will consolidate customer data and provide services on the basis of that data. An AISP could use current account data to provide a simple platform through which a customer can see all of their accounts in one place. It could also provide detailed budgeting services, tracking a customer's spending across multiple accounts and providing analysis on that customer's spending habits, without the customer having to release sensitive bank log-in details.
A PISP, as the name suggests, is able to initiate payments from the customer's account. A PISP could therefore provide an alternative to card payments. Previously, an online shopping service would usually pay to use a payment services provider (PSP) and an acquiring bank to accept payments on their behalf. A PISP would be able to cut out the acquiring bank (and the fees they receive) by integrating payment into online shopping checkouts, allowing the customer to pay directly from their bank account.
As of 13 January, AISPs and PISPs are able to apply for authorisation from the Financial Conduct Authority (FCA), and use the Open Banking platform to develop services.
A competitive edge
Banks are already facing challenges in meeting the requirements of PSD2, and five of those that have signed up to Open Banking have had to delay their launches.
Aside from technical challenges, banks will also have to be able to deal with communicating with multiple new entrants to the market, who could act as intermediaries between the banks and their customers. The banks will also face direct challenges from these new entrants: as an example, whereas previously banks were able to charge fees for acquiring online payments, they are prevented from charging AISPs and PISPs for access to customer data.
So what can the banks do?
Firstly, banks can apply to be AISPs and PISPs, and develop their own platforms and services to compete with third-party providers. The banks have an advantage: with online banking and mobile apps already in place they have experience in developing these services, and can use their existing online banking platform as a basis for further services. The top nine banks have also been involved in developing the Open Banking system. Third party providers will only now be able to start using the Open Banking system to develop their products.
Secondly, banks already have customers. With a lacklustre launch of the Open Banking system, and staged roll-out of data provision, Open Banking does not appear to be in the public eye. If third party providers are unable to quickly get their services out they may find that the market is already cornered by the traditional banks. OBIE suggests it will be months before the first third-party services are ready.
Finally, although Open Banking is as safe as online banking it remains to be seen whether consumers will be willing for their information to be shared. Existing banks have, to a certain extent, already got the trust of their customers and the majority of AISPs and PISPs are likely to be new fintech start-ups. With some banks already being accused of issuing warnings about Open Banking which amount to "scaremongering", it seems likely that cautious customers will initially stay away from new service providers, leaving millennials to lead the way.
The phased roll-out of Open Banking, and the regulatory requirements placed on AISPs and PISPs, means that its impact will be more slow-burn than explosive. In five years' time, however, the retail banking landscape might look completely different. Adam Land, Senior Director at the CMA insists that "This is a major milestone. These reforms will transform retail banking, completely changing the way that people interact with their accounts…The possibilities are endless."