PSD3: Replicating the UK’s open banking success to Europe

The UK is rightly seen as an open banking pioneer, and with the news earlier this year that open banking connections surpassed 15 million in July, the fastest growth to date, the success of adoption is clear -  from consumers enjoying greater control of their finances to merchants being able to offer customers faster, lower-cost and more secure payments.

It’s no surprise that policymakers across Europe are keeping an eye on the UK as they prepare for the next phase of payments regulation. With the PSD3 proposals having turned two this summer, leaders in Europe are continuing work to harmonise the payments market, reduce the space for national variations and open up new opportunities for consumers and businesses alike.

What Europe can learn from the UK

So what has helped the UK to march ahead of other markets? Key reasons for its success lie in its strong regulatory foundations, promotion by the government and regulators, and a collaborative market where banks, third-party providers (TPPs), and consumers come together to drive innovation and increase competition.

Another important factor is that UK banks moved fairly quickly on their digitalisation journey, which in turn made open banking not only possible but a natural next step. In contrast many European banks remain heavily segregated and powered by legacy systems, hampering modernisation and acting as a barrier to achieving the same level of progress. 

The UK also benefits from a standardised API framework developed by a centralised entity – the Open Banking Implementation Entity (OBIE) – following a mandate from the Competition and Markets Authority (CMA). This framework includes detailed API specifications, security profiles, and customer experience guidelines facilitating interoperability and a consistent customer journey across the expanding financial ecosystem.

This approach has encouraged fintech innovation and the development of user-friendly apps and services that are empowering consumers and small businesses to manage their money more effectively, leading to tangible benefits like improved financial management and increased access to credit.

What’s more, open banking is being adopted by the UK government in its own services, as it looks to lead by example. Earlier this year open banking services were embedded within the government’s tax collection systems, and it’s seen significant adoption. In the first 20 days of January this year, taxpayers sent more than £1.7 billion to HMRC using Pay by Bank, exceeding 500,000 transactions.

Why Europe can’t afford to lag behind

There’s quite a contrast with Europe, where PSD2 entered into force across the EU in January 2018, at the same time as open banking was introduced in the UK. By requiring banks to grant access to customers’ financial information to authorised TPPs, with their consent of course, PSD2 paved the way for new online payment services and apps, sparking the advent of open banking in the region.

However, progress has been considerably slower than in the UK. While this can be attributed to a number of factors, such as inconsistent regulatory enforcement and insufficient fraud protections, one of the main issues is that non-standardised APIs have led to market fragmentation. This poses a major technical challenge for fintechs and other TPPs – needing to integrate with a different API for each bank simply isn’t practical and very resource-intensive. 

Another point to highlight here is that the product and payment experience should always be at the forefront of open banking, rather than decisions being driven purely by regulation. We’ve seen with PSD2 that, when regulation drives changes, often only the bare minimum is delivered. This can lead to outcomes that lack consistency across institutions and ultimately harm the end consumer. In contrast, when the customer experience leads the decision making, key elements around it - such as architecture, API consolidation, proper monitoring and exception handling - tend to follow organically, driven by those rising customer expectations.  

Understandably, many working across the industry feel Europe can improve on PSD2, including in key areas such as API standards and Strong Customer Authentication (SCA). With consumer expectations evolving fast, the hope is PSD3 will enable merchants to not only match them but to ensure they are kept safe while doing so.

Closing the gap with PSD3

The European Commission first announced its proposal for PSD3 in June 2023, also introducing a new Payment Services Regulation (PSR). Two years on, the Council of the EU took a significant step forward by formallly agreeing on its negotiating mandate for PSD3 and PSR in June. 

The expectation is that a final version will be published by the end of 2025, and then member states will have 18 months to transpose the new requirements into national law. The sector would be well served using this time to reflect on lessons from the UK regarding effective standardisation and achieving stakeholder buy-in.

Transforming open banking rules into an EU regulation will reduce inconsistent national interpretations and help harmonise API standards and other requirements. It will also help provide the right regulatory conditions to extend data sharing beyond bank accounts to encompass other financial products and services.

For merchants specifically, open banking will allow them to integrate more convenient new payment methods, with open finance potentially giving them the data they need to offer new personalised propositions to their customers, whether that’s an accurate credit assessment to extend credit lines or a tailored insurance policy for their new purchase. 

As the EU looks to replicate the UK’s success via PSD3, the challenge is not only regulatory alignment but also market adoption. The businesses that thrive will be those that seize the opportunity by building customer-centric services, embracing standardisation and partnering with providers who can help them adapt.

If PSD3 can deliver on its promise, Europe won’t only be catching up with the UK, it will be laying the foundations for an integrated payments ecosystem that empowers businesses and meets consumer demand. The opportunity is significant and those who prepare now will be best placed to shape the future of European payments.