What is Open Banking and how does it relate to PSD2?

 There is much talk in banking circles about what is being called ‘Open Banking’, but what does this mean to consumers, banks and intermediaries and what is the relationship with the EU’s Payment Services Directive V2 (PSD2)? In this series of blogs we will attempt to explain what this means to the different parties and what we are seeing happening in the market around these initiatives.

The concept of Open Banking is being used around the world to describe the goal to make banking more dynamic. In the past, people often opened a bank account with one bank and stuck with that bank for the rest of their lives. Banks often used that fact to ensure that their systems and processes were extremely closed making it extremely difficult to move accounts from bank to bank or use the services of another bank. It also meant using different applications to access information from each different bank.

Governments have pushed banks through regulation to make it much easier to switch between providers. While the banks resisted this in the past, it is now a fact of life and the banks know to support this they will need to make their IT systems and processes more accessible. In parallel to this has come a technological revolution enabling consumers to do far more than ever was thought possible on mobile devices. As the banks are now being targeted by high tech, so called ‘challenger banks’, they are attempting to open up their systems for use by small, agile and clever organizations (commonly known as ‘Fintechs’) building products around those banks.

In simple terms, this is being done by the banks technically through making what are called Application Programming Interfaces (APIs) available to those organizations. These ‘APIs’ are simply a way for the banks to make the data they hold on customers available to software applications and open the possibility for consumers to have a single view of their accounts in multiple banks:

psd2 overview image

Unfortunately this is not proving an easy task for the legacy banks worldwide and thus it is happening slowly. This is where the Payment Services Directive V2 (PSD2) comes into play. The EU have mandated that all banks within the EU must provide APIs to enable access to their customer’s data to organization approved by the financial authority in each different country. This directive came into force on the 13th January 2018, however, many and in fact most banks have yet to publish APIs but they are going to have to bite this bullet over the coming 18 months.

While the PSD2 directive has a number of issues which we will deal with later in this series, it is likely to prove to be the ‘stick’ that forces banks to implement an Open Banking strategy and open up their data to authorised external parties. Ultimately it is expected that some banks will open up more of their data and services depending on their attitude to Open Banking initiative that we will also cover later in the series.

In the next of these blogs, we will deal with what Open Banking and PSD2 will mean to consumers.