The payment Services Directive (PSD2), introduced by the EU in 2015, is considered the foundation of open banking. Why is this important? Because it lays the groundwork for the banking changes that are happening today in Europe and what will soon happen, I believe, in the rest of the world.
The regulation applies to all payment service providers (PSPs), i.e., banks, payment institutions and electronic money institutions, and it covers all types of payment accounts and methods, except cash and paper-based payments.
The most important component of PSD2 is that it enables all payment account holders across the EU to provide third-party access to their payment accounts, with their express consent, and it dictates that this access will be done through “strong customer authentication” and “open APIs.”
In addition, it establishes two new types of third-party providers (TPPs):
- Payment initiation service providers (PISP): Services to initiate payments at the request of customers, with payment being executed by the providers where the accounts are held.
- Account information service providers (AISP): Multiparty consolidated transaction reporting services.
PSD2 assigned the European Banking Association the task of developing regulatory technical standards, which were published in November 2017 and will be effective in September. The standards specify the requirements of common and open standards of communication for customer authentication and engagement to be implemented by all account servicing PSPs. Once these standards are in place, there will be a number of new entrants and new services coming into play.
UK OPEN BANKING
In August 2016, the Competition and Markets Authority (CMA) in the UK published the results of a Retail Banking study focusing on the banking products offered to consumers and SMEs. The study concluded that many of the customers banking in the UK were paying above average prices for below average service quality, and that the UK banking system, highly consolidated in nine bank providers, was in need of disruption.
Similar to the founding of PSD2, in 2017 the CMA mandated that banks share their product and reference data with authorized third parties in a standard format. This use of a standard format is unique to the UK Open Banking initiative and is proving to be a massive enabler. Today the initiative includes the following account information, payment initiation, confirmation of funds and event notification.
There are currently more than 100 TPPs and account providers registered in the UK’s Open Banking Directory, making data available through this initiative. One of the practical applications of UK Open Banking that is available today is the possibility for any business selling directly to consumers to collect directly through a bank account at the point of sale, with certainty and in a secure manner, instead of using a credit or debit card. For example, Adyen, a payments processor and a PISP, recently announced that it is enabling KLM Airlines to collect directly and in seconds from customers’ bank accounts in the UK.
BENEFITS FOR TREASURERS
Some of the immediate implications of open banking for corporate practitioners are the following:
- Consolidated real-time reporting across balances and transactions in all accounts and currencies, translating into better cash flow forecasting
- Payment initiation across a single application
- Significant cost savings through the reduction of connectivity complexity with the banks
- On the business-to-consumer front, merchants could become PISPs or use a TPP and push for cost effective/faster payment methods, i.e., account collection at the point of sale.
The hope is that UK Open Banking and PSD2 will reverse the assessment of the CMA and the European Banking Authority, so that consumers and businesses will receive banking services they consider valuable for less money, and the competitiveness of the EU Banking market will significantly increase.
As you can see, PSD2 and Open Banking in the UK will spawn a multitude of new services and increase efficiency for customers. It is therefore important that corporate practitioners work closely with their banks and keep a sharp eye on TPPs and other new market developments.
For more insights on PSD2 and open banking, be sure to download the AFP Payments Guide, The New Generation of Third-Party Providers, underwritten by DBS.
Cristina Pintado is an international treasury consultant, technology and media industries, for Wells Fargo.