By Nick Caley, Head of Financial Services and Regulatory, ForgeRock
14th June 2019 is the next significant milestone for Europe’s second Payment Services Directive (PSD2), yet you’d be forgiven if you weren’t even aware it was happening, with banks and Account Servicing Payment Service Providers (ASPSPs) still struggling to deliver against a timeline that has been known for years. However, despite the low-key response, this date does matter, with those banks that fail to meet it likely to fall behind the competition and face additional burdens in terms of time, costs, and competitiveness.
But what exactly is the June 14th deadline – and how will it impact banks? And, more broadly, what will it tell us about the state of PSD2 implementation across Europe?
A final checkpoint before full-blown implementation
Application Programming Interfaces (APIs) are the core technology that will make PSD2 successful – or not – by allowing third-parties, such as fintechs, to access a bank’s customer account information securely. 14th September 2019 is the ultimate deadline when banks are required to open up their account information in production environments to third parties through a dedicated third party access interface. However, if their dedicated interface hasn’t been sufficiently tested and used by third parties before this deadline, banks must also back up the interface with a contingency mechanism.
This is where the 14th June deadline comes in: this date marks the last opportunity for banks to be granted an exemption from having to implement contingency mechanisms to back up their dedicated API.
There are a number of very good reasons why banks would want to avoid these ‘contingency’ or ‘fallback’ mechanisms. Most significantly, they represent a continuing cost burden, soaking up expert resources supporting a method of access that has run its course. They also bring considerable security risks because they involve so-called ‘screen-scraping’, whereby the security credentials of banks’ customers are shared with the third parties. The maintenance work required drains engineering teams who are already stretched, directly impacting on the time they’re able to spend working on a banks’ main third-party interface.
So avoiding this contingency requirement should definitely be a priority for banks, but how do they get one?
To gain an exemption, banks must demonstrate they have a valid roadmap to implementation, including a dedicated third-party interface that is in testing and being “widely used” by existing third parties. Transparency is key. According to the European Banking Authority (EBA), ASPSPs must provide regulators with “a summary of the results of the testing”, as well as a copy of “the feedback received” from the third parties that participated in the testing and “the issues identified and a description of how these issues have been addressed”.
Those banks that failed to implement testing facilities by now are still encouraged to reach out to the regulator with their PSD2 implementation roadmap. If they can demonstrate that they are making an effort to develop and test a third party interface, they may be awarded an exemption.
Beyond the practical reasons banks should seek an exemption, there is also a longer term incentive: after all, having a successfully implemented third-party interface will be the only way banks will be able to truly compete when PSD2 comes into effect.
The promises of PSD2 put banks in pole position
Once banks have their foundational APIs in place, there are myriad opportunities for PSD2 to disrupt other industries, and open up new revenue opportunities for banks. As well as providing new levels of convenience for consumers, banks and financial service providers can expand their offerings and pivot to become customer-first digital services.
For example, payments services in connected cars will open up the automotive industry to banks, with users being able to connect directly to their bank accounts as they make use of different services. Imagine being able to pay for parking, fuel, toll-booths and on-demand infotainment services from the dashboard of your car. Streamlined, customer-centric payments methods such as these will also leverage the latest technology such as biometrics and voice -enabled commands to be as secure and dynamic as possible.
Such convenience is a no brainer in-terms of customer choice, and so the brands that can define and implement this level of seamless user experiences will be able to challenge the traditional financial services structures that exist today. This of course includes the financial arms of the automotive manufacturers that recognise the development of their very own hardware-based marketplace of digital services focused around drivers and their passengers.
Implementation is still slow across Europe
However, despite the size of the opportunity, and the serious roadblocks that failing to meet the upcoming deadline could cause, many banks and ASPSPs are simply not on track. What’s more, there is a growing frustration from the fintech community about the lack of quality APIs in the market.
In the UK, the CMA9 have supposedly had a head start due to the rollout of the UK Open Banking Standards, which promoted the early adoption of the regulatory standards that underpin PSD2 ahead of time. Theoretically, this means around 90% of the population already has access to open banking services. But even here, uptake has been slower than expected, and the CMA9 have been in the regulators’ sights since the start in January 2018 for missing the first deadline, with adoption continuing to be slow throughout the year.
There are some mitigating factors. Banks’ legacy infrastructures, which often involve complex manual processes, combined with the burden of regulatory risk and compliance, make change slow and difficult to implement, while the fact their systems have to be scaled to millions of customers also makes new deployment challenging.
However, there are new digital challengers such as 10x offering a white-labeled banking platform capable of addressing the missing capabilities of banks’ digital offerings. Equally there are numerous solutions that are being developed specifically for PSD2, such as Standards based, compliant Sandboxes which can be deployed rapidly to provide the testing facility, so excuses for lack of compliance should be non-existent.
Banks must act fast or forgo the future
While slow implementation across Europe is yet to create any real casualties, come September 14th reality will start to hit as third parties sound the alarm on those banks whose interfaces are causing problems. As adoption of Open Banking increases, those banks who deliver poorly designed API infrastructure, or get stuck supporting contingency mechanisms, will ultimately have detrimental effects on consumers, permanently damaging the brand reputation of those involved.
This is why the upcoming June deadline is crucial: it’s the last chance for banks to get on track with their PSD2 compliance, and stay ahead of those competitors who will open themselves up to increased risks and costs through the contingency mechanism or fall behind the rest as the future of banking comes into effect.
Although achieving compliance may seem like an insurmountable goal by itself, banks should also beware of settling for the bare minimum. They need to go beyond the point of merely complying and commit to real and ongoing innovation if they want to build a true leadership position. Everything is still to play for – and only those banks that are committed to testing and developing new open banking technologies, delivering meaningful use cases that drive customer adoption, and working closely with the fintech community will win out.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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