Open Banking: banking but not as we know it?
This Paper outlines the potential impact of the combined open banking and new PSD2 Directive on UK banking which started in January 2018. It looks at new banking applications and potential improvements to the current account market as well as consumer protections.
2018 saw the start of two legislative initiatives that have the potential to dramatically change how people bank, or who they bank with:
- Open banking
- Payment services directive II (PSD2)
Part of the impetus behind these is a view that the retail banking personal current account (PCA) market is, from a competition and consumer perspective, not working well.
Open Banking (OB) requires firms to
- make it possible for people to share their financial transactional data far more easily with third parties online.
- allow third parties to initiate payments directly from a person’s account as a bank transfer as an alternative to credit or debit card payments.
- make public and openly share their product information and importantly, their customer satisfaction scores and separately other ‘service level indicators’.[1]
At OB’s heart are the Application Programme Interfaces or APIs which bring disparate applications together in a functioning whole in an analogous way as, for example, Uber ‘glues together’ Google maps, payments and telephony to help people order and pay for taxis quickly.”
The first Payment Services Directive (PSD) was implemented in the UK in 2009. It established a European-wide legal framework for payment services by setting the information requirements and the respective rights and obligations of payment service users and providers.
When reviewing the PSD in 2012, the European Commission argued that the legislation had introduced a number of benefits such as an increase in competition and choice. It was clear though that in order to remain relevant to the financial services environment it needed to change to reflect the rapid change in markets and technology in payment systems. Thus PSD2 was born.
For simplicity’s sake, OB can be thought of as referring to technological solutions and opportunities for a new type of banking and PSD2 as its legislative base. In practice the two are interlinked.
The introduction of OB, following its go-live date (13 January 2018) has been rather quiet with fears over data and financial security dominating media headlines.