In 2018, the European Payment Service Directive (PSD2) forcibly took effect across the European Union (EU). Through PSD2, banks were mandated through government legislation to enable access of consumer-authorized data to third parties. In providing a regulatory framework, the directive ultimately accelerated conversations surrounding Open Banking in the EU. It’s been four years since this transformative legislation was first adopted and it has had a profound effect on both consumer and commercial banking experiences across the EU.
The Pre-PSD2 Era
Open Banking, a secure way for financial institutions to provide third-party financial service providers access to data, existed well before PSD2 was implemented. However, the legislation has significantly accelerated both the adoption of and conversations surrounding Open Banking, unlike in the United States, in which adoption has proven to be more market-driven. According to the Open Banking Implementation Entity (OBIE), Open Banking adoption in the UK has continued to rise, with a noted 60% increase in new Open Banking customers in one year alone (December 2020 to 2021).
Before PSD2 came into effect in the EU, significant IT resources were needed to facilitate data accessibility by businesses. With notable hurdles in accessing data, the advantages of Open Banking were often only realised by large businesses with sufficient resources. Simple requests such as getting a loan required a convoluted process of filling out forms (if you were lucky, they would be accessible online), keying in data, and then sending the documentation from a company to the bank for confirmation. Enter PSD2, and this convoluted process was set to disappear, potentially opening doors for improved data accessibility, speedier transactions and more meaningful user experiences.
Competitive Pressure Brought on by PSD2
In enabling meaningful, data-driven innovation, PSD2 has proved to be a substantial consumer benefit by driving innovation and encouraging financial institutions to capitalise on practices set forward by Open Banking. Further, the legislation offers consumers greater control and options in relation to their banking information and payments. There are significant opportunities for banks to leverage PSD2 regulations.
“Those who’ve embraced Open Banking have seen how it has made it easier for customers to access FinTech products or even open accounts with other financial institutions while still transacting through their main bank’s platforms. Rather than getting frustrated with their bank’s limitations, customers will benefit by the ease in which they can work with their original institution.” - Clayton Weir, CEO and Co-Founder, FISPAN
Since 2018, there has been a significant increase in the establishment of consumer-focused banking services and innovation in the UK. This increase has fueled the competitive pressure in the consumer-banking space, thus enabling more intuitive and engaging customer experiences. Paykey is an example of embedded banking innovation. Paykey enables banks to offer their customers access to financial services, including peer to peer (P2P) payments, from within any mobile application. Paykey essentially integrates banking experiences within consumers’ everyday mobile interactions.
The establishment of augmented digital experiences has introduced a shift wherein there is increased competitive pressure on traditional banks to meet consumer expectations. A 2021 report by EY highlighted the need for incumbent banks to adapt their processes in response to emerging players and changing expectations in the banking space. The same EY report also identified consumers’ increased preference for enhanced personalization as a crucial consideration for banks’ processes and service offerings. Accelerated by COVID-19, consumers are now expecting more digital, seamless banking experiences and may switch to the financial institution that best provides them with these options.
Personal vs. Commercial Banking Experiences
Approximately two-thirds of new Open Banking solutions are geared towards consumers, with the rest towards small and medium-sized enterprises (SMEs), according to a 2021 McKinsey report. With this industry shift, services for large businesses have been left behind. As consumers come to expect intuitive and improved user experiences in their personal banking, the question arises: Why aren’t these experiences also offered in my business banking experience?
Comparing banking service capabilities provided to businesses and consumers, the difference between functionalities offered can be striking. At a high level, major efforts from PSD2 have surrounded the simplification of processes for personal accounts. As capabilities offered with personal banking improve, commercial banking services have been pushed to the side.
The reason why? Simply put - the intricacies required for personal accounts are not as complex as those required for large business banking accounts. Within the consumer environment, simple tasks, like account aggregation and payment approvals are enabled in a straightforward fashion; the same can also generally be said for micro businesses and SMEs. Moving further up the business scale, the complexities of these processes greatly increase, rendering the authentication of payments a more cumbersome process. When transactional volumes increase, there’s significantly less flexibility given to business accounts. In turn, business user banking experiences and apps have progressed much slower than micro accounts. Fortunately, Financial Institutions are awakening to this potential opportunity and are beginning to realise the vast market potential of open banking and digitizing the commercial banking sector.
Enter FinTechs and PSD2
Financial institutions are not the only ones in which PSD2 has enabled change. Within the wider discussion of Open Banking, an abundance of new opportunities have emerged, capturing the attention of technology firms. As third parties, FinTechs are granted access to authorized consumer data as instructed through PSD2. FinTechs like Snoop have identified opportunities for innovation using their increased access to consumer data. Through Open Banking, Snoop connects a users’ various bank accounts- all on one platform, placing greater visibility on a user’s financial wellbeing. In leveraging authorized consumer data, FinTechs are poised to provide meaningful user experiences. In deriving new innovations through data accessibility, FinTechs are going a step above the benefits provided solely by PSD2.
Robert Fillmore and Nigel Bateman of FISPAN demonstrate FinTech FISPAN's cloud platform live at Finovate Europe 2022. FinTechs like FISPAN can enable the functionalities not offered by PSD2 by connecting your bank to your ERP system.Since 2018, PSD2 has enabled transformative change for banking clients, Financial Institutions, and third parties, like FinTechs. As competition continues to evolve amidst the development of PSD2 and Open Banking across Europe, it’s integral that financial institutions stay ahead and continue to adapt to consumer expectations.
While PSD2 has accelerated conversations on Open Banking, it is not the be-all, end-all solution. Certain functionalities and data expected by clients are not enabled in full by the EU legislation, especially as we look further up in scale within the commercial banking space. For example, constraints are still present when navigating the authentication of payments for large banking services. As well, the information held in ERP systems are not mandated specifically within PSD2, limiting substantial potential in regards to flexibility and value.
Many thought leaders across the globe are preparing for Open Banking to launch us into the future. PSD2 has set a standard for regulatory compliance and we will continue to see its impact over the years as other countries announce and implement their own regulatory framework, modeled after PSD2. This is just the beginning; we will see this decade full of growth, innovation and change brought on through collaboration and financial data.
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FinTechs like FISPAN can enable the functionalities not offered by PSD2. By connecting your bank to your ERP system, FISPAN facilitates ease of use and ease of payments, while unlocking the data you need from your ERP. Set up a demo here to see how your bank can stay ahead of Open Banking and PSD2.