The world of payments is opening up with the advent of open banking, but how will this actually affect consumers?
The European Union’s revised Payment Services Directive (PSD2) recently came into effect, and open banking looks set to have a transformative effect on our everyday lives.
API-driven access will provide banks with the means to connect their data and payments services to third parties, opening up an array of opportunities for consumers.
Customer data and other innovations arising from PSD2 will allow legacy banks and nimble fintechs alike to create new revenue streams and intuitive services for the benefit of users.
While not without its challenges – such as balancing innovation with GDPR compliance and interoperability issues – it is a time of real evolution for payments across the EU and the wider world.
PSD2: A primer
The first Payment Services Directive (PSD1) was introduced in 2007 to create a single market for EU payments. PSD2, which came into effect in January 2018, is simply a response to the evolution of customer demands and growing fintech presence in the payments world.
PSD2 promises a whole slew of innovative merchant payment services; integrated and aggregated account and expenses monitoring; NFC withdrawal; instant P2P transactions; and even decoupled white-label cards.
In essence, customers who give their explicit consent to have their data used will benefit from the seamless nature of these new offerings.
A new breed of payment providers
As well as nifty new features, there are new breeds of payment service providers under the directive. Alongside banks and building societies, PSD2 also includes payment initiation service providers (PISPs) and account information service providers (AISPs). These offer aggregated bank account details and analysis services; and peer-to-peer transfers and bill payments, respectively.
A prime example is TransferWise, making inroads in terms of the historically irritating and opaque international payments market. Making its API available means the simplified service is available to other banks, something that German neobank N26 is taking full advantage of at the moment.
Change is on the way
Julie Connor, Bank of Ireland PSD2 group business lead, told Siliconrepublic.com that the move towards open banking and access to accounts represents “a fundamental shift in business model opportunities enabling innovation, as customers will also be able to more seamlessly integrate transactions into their lifestyles as banks interconnect with third-party services”.
She added that a wider array of options will allow customers to access and compare offerings based on their individual or business needs. She noted, as many others have, that this in turn will drive the need to ensure security and cyber protection, requiring constant improvements to ensure that trust and safety is maintained.
A level playing field
Sinead Ovenden, PwC Ireland financial services partner, said: “The introduction of PSD2 on 12 January this year created a level playing field for new entrants and traditional market players offering financial services. It offers more opportunities for competition and innovative payment service providers.”
‘Fintech service providers will use data to view consumers’ spending habits (with their permission), so they can develop products and services never provided before by the more traditional banking sector’
– SINEAD OVENDEN
She explained that PSD2 should be conceptualised as a “testament to the newly unfolding world” of open banking, where firms in sectors such as fintech, retail, gaming and social media “have the ability to change the payments landscape by removing the banks’ existing monopoly over customer account information and payment services”.
Ovenden stressed just how disruptive PSD2 is going to be for the current payment ecosystem. “Fintech service providers will use data to view consumers’ spending habits (with their permission), so they can develop products and services never provided before by the more traditional banking sector.”
Payments will become seamless
In terms of the influence PSD2 will have on our daily lives, Connor explained that payments can now become much more embedded into digital experiences for customers, making for a seamless experience that “allows consumers to focus on the service and ease of consumption as opposed to how to pay for something”.
She continued: “Think of a customer browsing for furniture online and, when they are choosing to pay, they could avail of an instant credit decision to purchase the furniture as opposed to needing a credit card, subject to a credit limit.”
The internet of things (IoT) future also looks far more tangible with PSD2 – imagine a smart fridge initiating payments for the milk and eggs it just ordered.
Connor explained that users’ expectations around payments will evolve. “In other words, if my email arrives instantly, why can’t my payment arrive instantly?”
Consumer sentiment difficult to predict
Open banking will not transform payments overnight, Ovenden said. “It will take some time for open banking to fully evolve but, without agile change to data management, the traditional bank may become more of a utility, with fintech solutions becoming a more common method for retail transactions.
Both Ovenden and Connor said that consumer sentiment will be impacted closer to the the regulatory technical standards (RTS) deadline in September 2019. Connor explained that at this early stage, the public opinion is difficult to gauge. “Security will be important to ensure customers still trust their bank services are safe, and the balance between this and new, appealing services will determine consumer confidence and uptake.”
Ovenden echoed the need for serious examination of security rules in order for the full benefits of PSD2 to be realised. She noted: “The security measures outlined in the regulatory technical standards need to be applied. We are now in a PSD2 transition period (between January 2018 and September 2019). The security requirements continue to be developed as the interactions between providers and complexity of cybersecurity are vast.”
What about GDPR?
GDPR is also looming large in the immediate future and the 25 May deadline will be another major transformation for the EU and payments concerning its citizens.
The protection of personal data across the 28-member bloc (and, indeed, any organisation that deals with EU data) will provide people with more control over their information than ever before.
Ovenden unpacked exactly how the two EU-issued changes would actually end up working in harmony: “GDPR is specifically designed to further enhance protection of personal data, and PSD2 facilitates further sharing of personal data.
“While the objectives of both pieces of legislation appear to contradict each other at a high level, they both consistently provide added protection to the use of personal data.
“The respective pieces of legislation have two different competent authorities who will supervise and interpret the relevant regulations. It will take time to see how the interpretation and interaction between the two regulators will play out.”
While new elements of GDPR, such as privacy by design and the right to be forgotten, will certainly be crucial to payment providers due to the sensitivity of financial data, firms must integrate the customer demand for innovation with adequate protections.
In Ireland, the Office of the Data Protection Commissioner will enforce GDPR, and the Central Bank of Ireland will be responsible for enforcing PSD2.
‘Collaboration is key to unlocking the potential of open banking through partnerships, to create new customer-facing financial products, interfaces and solutions’
– JULIE CONNOR
Opening the floodgates
How will banking and payments change in the next five years? Ovenden explained that the banking data monopoly coming to an end will allow for a variety of exciting products to materialise.
Connor added that the current open banking climate focuses on payment accounts. “To realise a full shift in how banks operate today, other mainstay products – like loans, savings, mortgages and pensions – would need a similar ‘open access’ approach.”
Fully digital offerings could become a reality in the future, embodied by a new cadre of smaller financial services, as opposed to the traditional retail banking model where banks compete on multiple product lines.
Connor added that Bank of Ireland is hard at work developing its technology infrastructure to support its API activity. She noted: “Collaboration is key to unlocking the potential of open banking through partnerships, to create new customer-facing financial products, interfaces and solutions.”