Open Banking / PSD2

Data is key! The most important asset in the world today—and banking data is the “cream of the crop,” since it provides insights into how, where, and when consumers and businesses spend money, invest, and ask for credit.

Open banking allows for a myriad of third-party services to aggregate data from multiple financial institutions and let consumers analyze their spending and earnings, allowing them to better budget for the future. This was the first “common” use of the newly available information.

Other uses will surely arise or be more commonly adopted soon, with incumbents and new entrants vying for new opportunities, revenues, and information.

Alongside this disruptive change, open banking is currently encouraging greater competition between banks (and other fintech solutions) as they all battle to provide consumers with the best tech to manage their money and the best customer service to accompany it.

While open banking is not destroying traditional banking, it is instead giving customers more power to switch providers and pick products, meaning banks are facing stiffer competition.

Competition comes from:

• Other banks, who now aggregate multiple bank accounts in their online banking apps.
• User-friendly rivals and innovative fintechs, such as aggregators or new entrants like Revolut.
• Established tech-giants moving into the banking space, for example, Facebook with their new digital coin Libra, Apple Pay, or Samsung Pay.
• Well-known consumer service companies with good customer relationships like retail chains are starting to offer prepaid cards.

Open banking is very secure and drives up the security requirements of financial institutions—essentially, it is at least as secure as online banking.

The Open Banking API endpoints deployed by banks go through extensive testing by both the banks and authorized and regulated third parties.

Open banking fosters new techniques for identity verification and fraud prevention, creating important opportunities for banks’ open API initiatives. As it happens with any other new banking channel, risks of data loss, identity theft, data protection violations, money laundering, and financing terrorism must be considered and dealt with.

The current offering in open banking by most institutions is limited to the lowest common denominator—the regulatory requirements of PSD2, i.e. providing access to a client’s payment account and allowing for payment initiation (PIS) and account information (AIS) services by PISP and AISP providers respectively.

Most incumbent banks see this new channel and APIs as a threat, so they simply fulfill the regulatory requirement—these mandatory APIs cannot be monetized and have to be made available for free by the banks. Ideas to further monetize and create new revenue streams for banks have been scarce until now.

However, not only do the regulatory requirements guarantee that open banking is here to stay, but also the competition creates pressure on the banks who are more defensive to go forward with their API initiatives:

• Either because it has a product or service where it has a competitive advantage, so it is in their best interest to provide another channel for distribution;
• Or to seek integrations with new sales channels, for example, integration with point of sales systems for easier credit or with business management and popular bookkeeping solutions and ERPs, allowing business users to more easily and efficiently execute banking operations.