PSD2 and the Open Banking revolution – three years and counting

It’s been three years since PSD2 extended the scope of Open Banking to third-party solution providers in Europe. With the global Open Banking market opportunity touted at $43.15 billion by 2026, expectations were high. Fintech companies of all kinds – payment service providers, remittance companies and challenger banks – lined up to connect. But it’s only in the past year that the reliability and range of APIs connecting accounts have begun to live up to that promise.

The benefits

For consumers, the benefits are wide-ranging. Open Banking gives them greater control over their finances and a streamlined user experience. They can access all their accounts and integrate non-banking financial services in one place, for example.

Open Banking has proven its worth for businesses too, offering lower operational costs, efficiency savings, and powerful insights into customer behaviour that can underpin new products and services. These benefits have taken on even greater significance since the onset of the global pandemic. Digital payments became a must and an accurate view of consumers’ financial position is invaluable in retaining business.

The issue

The speed at which these API-driven services can be up and running and the ease with which a company can integrate them into a secure, customer-friendly solution creates tangible benefits for all. So why has it not gone further?

Many banks have been understandably reticent to release their monopoly on customer data, viewing Open Banking as a threat. With banks viewing the building and maintaining of APIs as a compliance exercise, the quality and reliability of the technology have inevitably suffered. Add to this the fact that PSD2 did not set out any specific technical standards for APIs (only in the UK is there any official quality control via the Open Banking Standard) it is not surprising that standards vary between providers and countries.

Investment flows feed demand

There are sure signs that adoption is gathering momentum as more banks recognise the possibilities offered by Open Banking. From growing start-ups like Swedish fintech challenger Brite to Open Banking platforms like Token (€12.8m funding to expand in the EU), which supports standardised APIs across all banks. Also, Truelayer, which boasts most of Europe’s major banks as customers and UK-based Volt which raised €19.7M in June. Meanwhile, some big names are bringing functionality in-house, like for example, Visa acquiring Tink for €1.8bn.

Compliance and innovation go hand in hand

While Europe might reasonably claim to be the pioneer of Open Banking, around 58 countries all over the world are now working on Open Banking frameworks. Outside the EU, Hong Kong and Australia are among the key markets taking a regulatory-driven approach. But regulators are beginning to make more noise even in those jurisdictions that have previously been market-led. President Joe Biden’s executive order earlier this month is expected to provide a much-needed boost to Open Banking in the US, for example. While a new Interstate Treaty comes into effect in Germany this month that sets out required security and technical standards for online gaming companies. Gambling operators that fail to demonstrate a robust age verification solution risk having their licences revoked.

There is a fine balance between the customer-centric approach of PSD2 and the ability to adhere to strict data protection and anti-fraud and AML regulations. With many firms struggling to comply with the extended deadline for PSD2’s Strong Customer Authentication requirements, these pressures are ushering in a new era in which innovation and compliance must be intrinsically linked.

Pressure is also mounting from consumers. While Open Banking as a concept may not have been high on the average customer’s radar, the technology is behind many of the most innovative retail and banking solutions launched in the last year. As customers grow to expect these services, it will be financial institutions that get the blame if they underdeliver - those that fail to make their data available in a standardised format are likely to lose their competitive edge. 

Harnessing the opportunity

As Open Banking moves increasingly under the spotlight for both market participants and regulators, there is a great opportunity for companies that can deliver innovative data-centric services while also protecting against financial crime and safeguarding customer data. Having a flexible AML and transaction monitoring partner that understands the complexity of needs in this area could be the key to unlocking its full potential.

At Sentinels, we are ready to support both financial institutions and Open Banking businesses with intelligent and secure AML and transaction monitoring platform. Curious to learn more? Go to https://www.sentinels.ai/