With the payments industry in a state of post-pandemic flux, it is difficult to predict what the next iteration of Open Banking will take across Europe.
A similar question is being debated in the UK, with the Competition and Markets Authority currently examining proposals put forward during its consultation into the future of the Open Banking Implementation Entity. While some players are pushing to move away from mandated participation and funding of Open Banking in the UK, many other (smaller) players view such as move as being at odds with the very objective of Open Banking itself which may undermine the success of Open Finance in the future.
In Europe, the second Payment Services Directive (PSD2) is due to mark its two-year anniversary in September, and already it faces uncertainty around how it will evolve. The European Commission’s letter on the Retail Payments Strategy from September 2020 promoted data-driven innovation and enhanced access and data sharing as priorities for the EU’s Digital Finance Strategy. Notably, it pushed for an Open Finance Framework to be established by 2024.
This momentum toward Open Finance may prove challenging for Open Banking players, who will need to build on their newly established PSD2 foundations, requiring significant investment.
However, investment in Open Banking still remains a core priority for financial institutions across Europe. Tink’s recent survey, ‘Open Banking in the post-pandemic world’ found that over 68% of the European financial executives polled indicated that their interest in Open Banking increased during the pandemic. The opportunities presented by PSD2 to lower risk, anticipate financial distress, and even increase sales, all while improving the customer experience, were key factors driving this interest.
João de Azevedo Ferreira, analyst for Open Banking Europe explains that there are some key differences between Open Banking and Open Finance, these can include:
- API Providers (ASPSPs): Open Finance APIs can be provided by ‘other’ types of account holder such as insurance companies, pension funds, and wealth managers.
- API Clients (TPPs): Open Finance APIs can address different ‘clients’, such as TPPs regulated by a National Competent Authority (NCA) according to PSD2 or organisations not regulated by an NCA.
- Security: Open Finance client identification may/may not use NCA issued authorisation numbers, PSD2 eIDAS certificates, and/or scheme lists.
- Contracts: Open Finance APIs may require commercial contracts between the API Provider and the API Client.
Ferreira adds that these differences could be a cause for concern for Open Banking players. In order to be PSD2 compliant, API providers had to create an infrastructure that allowed easy, safe, and controlled access to payment accounts.
“In moving towards Open Finance, ASPSPs want to build upon what they already have because it works, is proven, and is efficient. However, Open Finance is an opportunity for disruption, which may break any ties to the PSD2 infrastructure. The goal will be to find ways to improve on PSD2 Open Banking using the existing foundations. This may result in more standardisation, allowing for uniformity in the API offers and a better user experience.”
Mattias Levin, deputy head of unit, Directorate-General for Financial Stability, Financial Services and Capital Markets Unio (DG FISMA) explained the Commission’s approach to Open Finance in Tink’s report.
Levin explained that the Commission wants to increase competition in the market and sees real opportunities for Open Banking go beyond traditional banking. “At the same time, we have a regulated industry for a reason. Every change needs to be carefully calibrated to ensure financial stability, consumer protection and inclusion.”
“Next up is business-to-business data sharing, which we label Open Finance. Building on the evaluation of PSD2, we will put forward a framework for Open Finance. It is a key component in the digital finance strategy and an area we will be keeping a close eye on.”
Open Banking and the evolution to Open Finance will be a core topic discussed at the Euro Banking Association and Finextra’s EBAday 2021. Running in digital format on 28-30 June for its sixteenth year, the event will welcome a host of board directors, chief executive officers and payments and technology heads from Europe’s leading banks, as well as selected fintechs. You can join almost 2,000 other participants at the event by registering here now.