Will PSD2, a regulatory-driven movement to expose banking APIs, result in something that will make a difference by opening up the competition and European-wide reach of banking services?
It is commonly known that PSD2 is not a technical standard, actually quite far from it. Third Party Providers (TPPs) are the ones that should be benefiting from this change, so let's take a look at how this looks from their perspective.
Current status of implementations
Several industry initiatives (such as STET and Berlin Group) have developed specifications for PSD2 API frameworks. Account-holding banks (ASPSPs) are free to adopt one or develop their own variant, as long as it complies with the regulation. The current market development indicates that banks are likely to follow a certain standard based on their geographical location. With the emergence of multiple standards, the TPPs are put in a difficult position. “How much am I willing to invest in order to gain the needed reach for my services? Will PSD2 actually pay off as catalyst for my business success?” We already see some symptoms of increased burden in terms of semantic differences and naming conventions even in case of a single standard such as the UK open banking initiative.
A consent handling and access authorization to PSD2 data is another topic of concern. Standardization initiatives leave a lot of room for interpretation on how the consent handling should be implemented and it will be up to account-holding banks and local Financial Services Authorities to agree on the details. Consider a situation where you are a start-up and have a brilliant idea which leverages PSD2 APIs. Even in a single geographical location, ASPSPs (i.e. banks) are free to select from multiple access authorization schemes, ranging from a re-directed model to an embedded one. This is another concern of TPPs and even if this would be technically solvable, the customer experience is likely to suffer when assessing the convenience of service from an end-user perspective. Comparing the new regulation against what is currently possible for e.g. in Sweden with screen scraping, this would be a huge letdown for a conversion towards new services.
A new regulation is typically likely to introduce a room for new services and PSD2 does not make an exception. Businesses will look at solving the above-mentioned complexity by providing an aggregation service hiding the complexity of different PSD2 API implementations. When TPPs link to these hubs, they can focus on the core business and develop Account Information Services) and Payment Initiation Services more easily because the hub service provider is taking care of the ASPSP connections and providing a standard API access towards TPPs. When developing the hub concept further, a natural next step is to start exploring the interoperability between these hub service providers to reach a truly European-wide playing field. Specific market initiatives such as CAPS (Convenient Access to PSD2/Payment-related Services) are addressing the issue with a market fragmentation in PSD2 domain.
Open banking will develop beyond PSD2, because that is where the real business opportunities are for banks. A likely scenario is that hubs will start to aggregate any financial information made available, not only what’s regulated by PSD2.
Hubs providing wider access to other wealth and ownership data will offer appealing opportunities for TPPs and Fintechs, but also an opportunity for banks. In the long run banks cannot offer a successful open banking marketplace without providing a proper access to other banks’ financial data and other relevant data sources.
Blog post: PSD2: Game changer or not? Some might say that PSD2 as such will not be a huge game changer. But in fact, the impact of PSD2 goes way beyond the mandated APIs towards open banking.
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Janne works as a banking business architect in Tieto Financial Services. His role is to identify and lead the transformation initiatives regarding Tieto’s banking services and to help customers to re-define their banking solution landscape. Curiosity and continuous learning are the key ingredients for Janne to keep on top of a fast-changing banking landscape and regulatory regime. Open banking, PSD2, payments, lending and overall banking architecture are the key areas in his daily work. His background from telecom industry has been a great asset to apply new technologies to support the future banking experience.