Break out the PSD2 birthday cake! On January 13 the Second Payment Services Directive (PSD2)– what we now generally think of as open banking– turned two years old.
PSD2 still has a long way to go but has made some impressive progress in the fintech sector. So after two years in, is PSD2 a success? And where do we go from here?
Despite growing pains, there is evidence that PSD2 has had a positive influence on the fintech industry by promoting both innovation and competition. Challenger banks have taken advantage of open banking, making Europe the leading region for such non-traditional financial institutions. Germany’s N26, for example, now has 2.3 million users– a 3x increase from the year prior.
Although some consumers may not realize it, they are indeed better off. Many banks have expanded their APIs and integrated with third party providers. Additionally, the introduction of more players has increased competition which, in turn, encourages banks to enhance their offerings and customer service. We recently spoke with Token.io CEO Todd Clyde, who added to this list, noting that open banking also offers consumers access to cheaper credit.
Clyde also laid out benefits for businesses and banks. “Businesses will benefit the most from a dramatic reduction in the cost of payments and will therefore lead the adoption of open payments,” he said. “Banks will benefit as they move from compliance to commercializing open banking and bring new API-enabled propositions to market which allow them to compete with big tech and fintechs in the new financial layer and re-intermediate themselves with customers.”
Missed the mark
The progress for compliance with PSD2 has been slow, primarily because of the cost to adapt. Last March, Tink interviewed 442 European banks across 10 markets and found that 41% of the banks were not in compliance with PSD2. Specifically, these banks failed to provide third parties a sandbox to test their APIs. Legacy systems in particular are costly to modernize, which is necessary when integrating with open APIs.
“On the payments side, the stability of the APIs is the greatest barrier, said Clyde. “If a data API fails and your balances are not reflected correctly for a few hours, the consequences are minimal. The same is not true for payments where API resiliency must be high in order to deliver success rates equal to or greater than cards.”
Additionally, end consumers are still not well educated on the purpose or benefits of PSD2. One of the aims of open banking is to place consumers in control of their own data. This means that consumers can allow third party companies to access their data easily and securely and have the right to decide what information third parties can access and for how long. However, Tink reported that, even among senior financial services executives, 20% were “not very familiar” with PSD2. If financial services companies aren’t educating their staff about PSD2, it’s unlikely they are educating their consumers.
Where do we go from here?
In an interview with Adam Farkas, executive director of the European Banking Authority, NS Banking reported that the new regulations will help the European payments market scale more easily and faster than in other regions and that industry participants will compete on a more global scale. Thus far, this has proven to be true. As we mentioned previously, the explosion of challenger banks in the European region is evidence of increased competition.
Multiple other fintech sectors have the potential to scale, as well, including:
- PFM solutions are benefiting from a more liberal flow of customer account information and account aggregation.
- Fraud prevention solutions prove more effective when they have access to more consumer data. When a customer opens a new account or applies for a new product or service, fraud prevention solutions are able to verify the person’s identity by cross-checking their personal data, such as name, address, and email, against their other accounts.
- Underwriting has the potential to become more efficient. When underwriters have access to up-to-date information from credit bureaus combined with a full picture of an applicant’s financial situation, they are able to make more informed decisions and lower default rates.
- Digital lending also benefits. In a chat with digital lending company ITSCREDIT, company CEO João Pinto said, “One of the strengths [of ITSCREDIT] is that the platform is open so that implementations can use as much data as is available in order to have a more complete view of customers and their financials. In this scenario, open banking is a key element. It not only makes much more data available from different players, but also makes integrations much easier.”
- Traditional banks can create more effective marketing campaigns to customers.
According to Token.io’s Clyde, banks laid the groundwork for open banking with APIs in 2019 and he expects 2020 to be a turning point for open banking. “After a period of stabilization for APIs, transactions will soon follow, starting with data and progressing to payments. 2020 will also be the year of open payments in the U.K., with certain merchant categories going live with single immediate payments and transaction volumes following.”