PSD2 AND OPEN BANKING: INTRODUCTION

The EU Revised Payment Services Directive (PSD2) comes into force in January 2018, so as we head towards the fourth quarter of 2016, it is reassuring to observe a clear shift in the thinking about, and approach towards, this signficant regulatory change on the part of many of Europe’s banks.
During 2016 there have been events which have shed more light on the situation. One is the release of a much anticipated document, the European Banking Authority’s (EBA’s) consultation paper on the draft Regulatory Technical Standards (RTSs), specifying the requirements on strong customer authentication and common and secure communication under PSD2. Though questions remain about how the Directive will be implemented in practice, in general the EBA’s document does seem to have quietened many of the banks’ prior concerns (though it has also created discomfort among some of the new entrants).

There have also been events which have muddied the waters of course – such as the surprise UK Brexit vote in June. Given the leading role the UK Government and UK banks have been taking in the open banking movement, through the Open Banking Working Group, the prospect of the UK not transposing, implementing and complying with PSD2 was an unsettling one. In reality of course that leadership role continues, and the UK’s banks are pressing ahead with their PSD2 compliance plans. Brexit cannot happen before 2018, and in any event the prevailing view is that, if anything, UK regulation going forward will continue to ’gold plate’ that of Europe, rather than conforming to any lesser standard.

In line with the reality of PSD2 solidifying, the banks’ attitude to it is also firming up, and becoming both more strategic and more positive. There has been a blurring of the hard lines that were still visible in some parts of the industry in the first part of 2016, less talk of competition between banks and new entrants, more talk of collaboration with fintechs to drive innovation for customers (retail but also increasingly corporate) and – crucially – stronger evidence of banks identifying not just challenges but (significant) opportunities in PSD2, and developing and executing solid strategies to capitalise on them.

The relentless march of time towards PSD2 day one is not the only driver in play of course. In parallel, the buzz around open APIs (and the open banking they facilitate) has also intensified through the year. Regulation is one reason for this – but not just EU regulation. To give just a few examples from outside Europe, China has had legislation in place since 2010 to underpin the safe provision of payment services by new entrants, and Singapore’s regulator among others also currently has its sights on the competitive landscape in banking and payments.
In concert with regulators looking to drive competition (reflected clearly in the findings of the UK Competition and Markets Authority that incumbent providers simply do not have to work hard enough to serve their customers due to a lack of robust competition) and protect consumers, two other key trends are prompting greater openness – ever-more savvy customers demanding it, and evolving technology to enable it.

Indeed, as Thomas Egner, Secretary General of the Euro Banking Association (EBA) says: “Much of the thinking about open banking is not in itself new, but until recently the technology was not available to further evolve this thinking and put it into practice, so the mindset of the industry just wasn’t aligned.”

Colm Lyon, CEO and Founder of Ireland-based new payments entrant Fire Financial Services, agrees that a number of factors are coming together now to enable earlier visions to be realised.

“I can remember when I was working in a bank 15 years ago and we launched online banking. It was more or less the same as it is now. We had the same ideas back then as we have now – but we had no way to deliver them and the market didn’t have the structure or the ecosystem to enable the alerting of and tagging of transactions for example. What we did was put paper statements online – because that’s what our data allowed us to do.”

Singling out the strongest driver among so many powerful levers for change is not easy nor probably necessary. Suffice it to say that banks worldwide are grappling with what open banking and open APIs mean for them. In part this is because they have global customers likely to want similar frameworks in place in all the markets in which they operate – so if openness is mandated in Europe (and elsewhere) it effectively impacts everywhere. But in part it’s because open banking is happening anyway, regulation or otherwise, in order to meet customer needs.


We do see a number of banks raising the PSD2 discussion to a more strategic level. They are saying that while at the moment when they sell to their clients it is their own products through their own channels, what they think is going to happen is that they will distribute their products through other channels – that will become completely normal – and they might also bundle their products with other services through their own channels. They really see the market moving to an open architecture.


It is a short step for the banks from recognising this change, to assessing their role in the evolving digital ecosystem, and to re-orientating their digitalisation strategies from a focus on the omni-channel customer experience to a focus on orchestrating that experience in a contextual way. In light of this, strategies and investments for PSD2, open banking and open APIs all become part of wider digitalisation strategies and investments.
“Digital has been an ongoing journey for Swedbank, and we always co-ordinate on a group level the time, money and resource we allocate to this,” says Kirstine Nilsson, its Head of Strategic Engagements & Relationships, Group Payments & Cash Management. “We have a valuable existing customer relationship, but we need to protect it and keep attracting new customers. Historically people have been hesitant to move banks, but in the new world they will not have to. They can change their digital channel quite easily by choosing to use another Third-party Payment Provider (TPP), and to remain relevant we have to ensure we are the trusted partner, provider of the digital channel. The digital environment can be a scary place for consumers, and our relevance is to ensure that it is as safe a place to be as possible.”

PSD2 AND OPEN BANKING: DEFINING YOUR ROLE IN THE DIGITAL ECOSYSTEM

The EU Revised Payment Services Directive (PSD2) comes into force in January 2018, so as we head towards the fourth quarter of 2016, it is reassuring to observe a clear shift in the thinking about, and approach towards, this signficant regulatory change on the part of many of Europe’s banks.
During 2016 there have been events which have shed more light on the situation. One is the release of a much anticipated document, the European Banking Authority’s (EBA’s) consultation paper on the draft Regulatory Technical Standards (RTSs), specifying the requirements on strong customer authentication and common and secure communication under PSD2. Though questions remain about how the Directive will be implemented in practice, in general the EBA’s document does seem to have quietened many of the banks’ prior concerns (though it has also created discomfort among some of the new entrants).

There have also been events which have muddied the waters of course – such as the surprise UK Brexit vote in June. Given the leading role the UK Government and UK banks have been taking in the open banking movement, through the Open Banking Working Group, the prospect of the UK not transposing, implementing and complying with PSD2 was an unsettling one. In reality of course that leadership role continues, and the UK’s banks are pressing ahead with their PSD2 compliance plans. Brexit cannot happen before 2018, and in any event the prevailing view is that, if anything, UK regulation going forward will continue to ’gold plate’ that of Europe, rather than conforming to any lesser standard.

In line with the reality of PSD2 solidifying, the banks’ attitude to it is also firming up, and becoming both more strategic and more positive. There has been a blurring of the hard lines that were still visible in some parts of the industry in the first part of 2016, less talk of competition between banks and new entrants, more talk of collaboration with fintechs to drive innovation for customers (retail but also increasingly corporate) and – crucially – stronger evidence of banks identifying not just challenges but (significant) opportunities in PSD2, and developing and executing solid strategies to capitalise on them.

The relentless march of time towards PSD2 day one is not the only driver in play of course. In parallel, the buzz around open APIs (and the open banking they facilitate) has also intensified through the year. Regulation is one reason for this – but not just EU regulation. To give just a few examples from outside Europe, China has had legislation in place since 2010 to underpin the safe provision of payment services by new entrants, and Singapore’s regulator among others also currently has its sights on the competitive landscape in banking and payments.
In concert with regulators looking to drive competition (reflected clearly in the findings of the UK Competition and Markets Authority that incumbent providers simply do not have to work hard enough to serve their customers due to a lack of robust competition) and protect consumers, two other key trends are prompting greater openness – ever-more savvy customers demanding it, and evolving technology to enable it.

Indeed, as Thomas Egner, Secretary General of the Euro Banking Association (EBA) says: “Much of the thinking about open banking is not in itself new, but until recently the technology was not available to further evolve this thinking and put it into practice, so the mindset of the industry just wasn’t aligned.”

Colm Lyon, CEO and Founder of Ireland-based new payments entrant Fire Financial Services, agrees that a number of factors are coming together now to enable earlier visions to be realised.

“I can remember when I was working in a bank 15 years ago and we launched online banking. It was more or less the same as it is now. We had the same ideas back then as we have now – but we had no way to deliver them and the market didn’t have the structure or the ecosystem to enable the alerting of and tagging of transactions for example. What we did was put paper statements online – because that’s what our data allowed us to do.”

Singling out the strongest driver among so many powerful levers for change is not easy nor probably necessary. Suffice it to say that banks worldwide are grappling with what open banking and open APIs mean for them. In part this is because they have global customers likely to want similar frameworks in place in all the markets in which they operate – so if openness is mandated in Europe (and elsewhere) it effectively impacts everywhere. But in part it’s because open banking is happening anyway, regulation or otherwise, in order to meet customer needs.


We do see a number of banks raising the PSD2 discussion to a more strategic level. They are saying that while at the moment when they sell to their clients it is their own products through their own channels, what they think is going to happen is that they will distribute their products through other channels – that will become completely normal – and they might also bundle their products with other services through their own channels. They really see the market moving to an open architecture.


It is a short step for the banks from recognising this change, to assessing their role in the evolving digital ecosystem, and to re-orientating their digitalisation strategies from a focus on the omni-channel customer experience to a focus on orchestrating that experience in a contextual way. In light of this, strategies and investments for PSD2, open banking and open APIs all become part of wider digitalisation strategies and investments.
“Digital has been an ongoing journey for Swedbank, and we always co-ordinate on a group level the time, money and resource we allocate to this,” says Kirstine Nilsson, its Head of Strategic Engagements & Relationships, Group Payments & Cash Management. “We have a valuable existing customer relationship, but we need to protect it and keep attracting new customers. Historically people have been hesitant to move banks, but in the new world they will not have to. They can change their digital channel quite easily by choosing to use another Third-party Payment Provider (TPP), and to remain relevant we have to ensure we are the trusted partner, provider of the digital channel. The digital environment can be a scary place for consumers, and our relevance is to ensure that it is as safe a place to be as possible.”