The Second Payment Services Directive (PSD2) marked the advent of a new era in banking and innovation across the European Union and the European Economic Area to maintain Europe’s competitiveness in the face of technological competition from other major global economic blocs. It requires the banks to share the information of their customers’ bank account to the third-party providers (TPPs) through Application Programming Interfaces (APIs). Using APIs, the banking data will be available in real time, enabling customers to transact, invest, and save better. Open Banking is thus seen a collaborative effort between the banks and the Fintechs, ensuring enhanced customer experience. Consumers trust banks but want differentiated experiences and services. While retail banking apps in India are reliable, lending, payments, and business banking need improvement, and that is where the expertise of tech players can be employed.
Open banking offering in the UK has grown significantly, with 25 account providers and 64 TPPs registered on the Open Banking Directory, including market giants like American Express, JP Morgan Chase, and Citibank registered as TPPs. In the US, large banks are striking data-sharing deals with individual partners in a departure from the legacy aggregator model (Mint.com) – Chase partnered with Intuit and Wells Fargo partnered with Xero and Finicity. In the EU and UK, PSD2 and open banking initiative are giving customers more control over personal account data. Based on data sharing capabilities, new digital finance ecosystems (e.g. WeChat and AliPay) are emerging in China. In South and Southeast Asia, fintechs are experiencing strong growth around APIs and data sharing. The growth of mobile wallets in India, after demonetization, is an example.
PSD2 encourages new entrants in Europe. In the UK, for example, 50 new players received licenses by becoming Account Information Service Providers (AISPs) or Payment Information Service Providers (PISPs). Newcomers have increased their share of revenue over the past year as incumbents’ share has declined. Traditional banks with legacy systems are developing digital capabilities, afraid of being disintermediated by new entrants with more fragile and superior offerings, helping their customers manage their financial affairs and make better decisions. Barclays enabled customers to add current accounts from other banks into their existing mobile banking application in September 2018 and today, over six million users avail of this service to manage their day-to-day finances. HSBC’s digital head believes that while other banks are still attempting to educate their customers about open banking, they have had permanent traction with their existing customers. IBM Payment Solution - PSD2, which works with the IBM Open Banking Platform, helps clients enable PSD2 standards-based payments from their core banking systems. Capgemini announced that it has been named a “Leader” in Everest Group’s inaugural PEAK MatrixTM for Open Banking IT Services.
However, according to a research conducted by YouGov, close to four in ten (39%) of those aged 55+ have heard of open banking, against just 14% of those aged 18-24. It is surprising that those in the older age groups are more likely to be aware as against we may expect a younger, more tech savvy audience to be interested in the ground-breaking products and services. The realization is growing that open banking offers a path to new revenue potential. PwC and the Open Data Institute have calculated that, by 2022, associated opportunities could be worth £7.2 billion. And, with all the main UK banks now living with the most recent open banking standards, activity is heating up. Hence, effort needs to be invested in educating the end user about the benefits of open banking.
Other challenges include data loss and customer privacy, agreeing on a trust relationship with third parties, API performance and scalability issues, and legacy systems. These constraints often hinder seamless integration with existing application landscape. While 75% of the banks in Europe think open banking helps in digital transformation, only 53% and 51% of the banks in North America and Asia respectively, think the same.
With open banking gaining traction worldwide, global investment is increasing. TrueLayer, the London based startup has built a developer platform to make it easy for fintech and other adjacent companies, such as retailers, to access bank APIs. Riding the wave of open banking and PSD2, the company has picked up further $7.5 million in funding. Banks in Europe (77%), North America (72%) and Asia (61%) plan to invest up to $20 million each to undertake open banking initiatives for commercial customers. Financial institutions should strongly emphasize on certain factors including a correct positioning strategy, working overtime to fend off the competition, unleashing innovative offerings, embracing evolving interoperability standards, deploying secure APIs, moving from legacy systems to 21st century systems, and focusing on customer education.