By Paolo Spadafora, CEO Epiphany
Banks today are facing several challenges to become compliant with PSD2 regulation. The main goals of the second iteration of the EU’s Payment Services Directive (PSD2) are admirable: they intend to advance the security of the customers – and, as a consequence, to reduce fraud – by implementing a stronger customer authentication (SCA) for online purchases, in addition to establish a higher level of competition and drive innovation by opening up the payments market to new players, or third-party providers (TPPs), mainly via the application programming interfaces (APIs).
While the deadline has past, several countries are behind and have postponed because many banks were not ready yet. Other countries who met the deadline are experiencing pressure by Third Party Processors as exposed interfaces are superficial and do not allow TPPs to fulfil the requirements they have to implement their services.
It is therefore clear that the industry felt relieved when in June 2019 when the European Banking Authority (EBA) allowed national competent authorities (NCAs) to extend the deadlines for SCA implementation beyond September 14. The UK’s Financial Conduct Authority (FCA) was the first to announce plans to give more time. Other NCAs, including the Central Bank of Ireland and the Bank of Italy, were close behind.
Despite this further permission, at the moment, banks are going through three main challenges:
- Their outdated core banking systems slow down or completely impair a bank’s ability to deliver new services and/or products
- Regulation & Compliance requirements often have no technical specifications, and this makes them hard to fulfil
- Shifting from an independent mindset and model to an ecosystem mindset and model mindset is proving to be difficult.
Furthermore, “new” and “old” technology rarely work together and require Open Banking application programming interfaces (“APIs”). As a such, integrating these two poses a high degree of challenges and is both time and resource intensive.
Regulations are written by the legal professionals, but banks must translate these into functional & technical specifications, leaving room for misinterpretation and often re-work which inevitably cause delays. To reduce these risks additional effort is needed when teams are forced to adhere to more complex development process.
Many traditional banks today operate like the closed version of the Japanese economy in the 1600s, where Japan was a closed economy and society. This result in a stagnated economy and culture.
Banks take a more conservative approach and are generally concerned about external parties that can disrupt the way things are done, viewing change as big risk. This is why lenders see the PSD2 as a threat, rather than an opportunity. This risk-averse mindset causes them to take the “minimum viable compliance” approach, which does not and will not lead to open banking, nor will all of these factors have combined yield better experiences for banking clients.
In our point of view, a real collaboration between both third parties and customers is required in order to overcome these challenges, with the final goal to innovate and satisfy banking clients’ needs and preferences in a timely fashion. If this does not happen, banks will face disruption, disintermediation and- worst of all- complete irrelevance.
Lenders will greatly benefit by collaborating with multiple players and absolutely should leverage a network of contributors (TPP) in the design process to develop solutions to identified problems, as opposed to new products.
Open banking has 3 main players: banks (also known as ASPSPs), authorized TPPs and customers. The majority of ASPSPs have exposed API or data interfaces, however many differences exist across countries due to variations in the law transposition and lack in adopting standards for technical specifications.
Moreover, many banks customized their APIs even if they state they implement a standard.
This is an issue for the entire ecosystem to operate effectively and efficiently. More time and resources are needed to align different offerings across countries causing a deferral of Open Banking adoption for and by Consumers, and as such, a delay in securing a great customer experience. When consumers are not satisfied, further disruption emerges: an example is represented by BigTech taking their billions in capital and enormously trusting base and becoming banks themselves. This is where we are getting to, and what banks need to face: a third force of nature, the big tech.
Another important topic, unfortunately rarely discussed enough by the open banking community, is related to customer awareness. Open Banking is almost unknown to bank users: the EBA and connected institutions should force NCA to allocate resources to educate consumers and businesses, explaining the matter from all perspective and the benefits that it will bring to the entire community, and more, specifically choice and convenience.
We predict that if 2020 will be the year we see harmonization and tuning of the “PSD2 Infrastructure”, the end of 2020 or begin of 2021 will probably mark the beginning of Open Banking adoption.
Customers will start to see the benefits of Open Banking in the middle of 2020: personal finance management will manifest transparency, instant credit will improve customer experience to access credit, automated transaction reconciliation, better payment integration, and so on, will bring immediate benefits to SME boosting their performances.
Once this happens, banks will also see the results in terms of higher customer satisfaction and revenue.
Banks need to embrace open banking, including embracing of partnerships and new methods that accelerate innovation. Innovation fuels both growth and engaged customers. Open banking is a big change and many people don’t like changes; but change Is the reason we have evolved and still do.