In a bid to offer consumers a host of new financial services, a number of “game-changing” financial regulations have come into effect across the European Union.
The much-anticipated Revised Payment Services Directive (PSD2) allows fintech startups, technology providers and even retailers such as Amazon to directly obtain individual consumers’ financial data, provided the consumer’s consent has been granted.
The new regulations, or Open Banking rules, require European financial institutions to give third parties access to their customer data, if the account holders agree. They are designed to bring more competition to banking so that other financial services providers can offer other services to a bank’s existing customers. In theory, a consumer would be able to access a number of services from rival companies through a single banking app.
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These third-party providers (TPPs) of financial services must be approved by national regulators, who in turn fall under the supervision of the European Banking Authority. TPPs will use consumer data to tailor account services to offer mortgages, savings and investment plans, and other services according to personal profiles.
“Under PSD2, consumers have the legal right to share details of their current and credit accounts (including login details) with regulated third parties and banks can no longer stop consumers from choosing how their data is used and shared,” said Sean MacNicol, a spokesperson for MoneyDashboard, a budgeting app.
Put simply, established banks will lose their near-exclusive ownership of consumer financial data and be forced to compete with new account information service providers (AISPs)
“We all believe that open banking will be one of the biggest developments probably in the century,” said Mark Curran, director of payments and open banking of CYBG, a holding company that owns several UK banks. “We don’t know when the big impact will hit. We realize that we have a responsibility to coax the market back to life.”
Slow implementation of PSD2
Back in 2007, the EU Commission assessed the state of banking in the Union. It found the financial services sector was inefficient; it was fragmented, ripe for monopolization, weakly regulated and lacking technical standardization. In April 2015, the European Parliament and the Council of Europe released a directive meant to solve these problems: PSD2.
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EU countries were directed to implement PSD2 into national law by January 13, 2018. Some, like the UK and Germany, have finalized bills and passed them through their national parliaments. Others, like the Netherlands and Italy, are still in the process of amending relevant legislation. Other EU countries have scheduled parliamentary votes over the coming months.
Details of how the new law should be applied in a practical sense were released by the EU Commission on March 13, 2018, in the form of Regulatory Technical Standards. According to the Berlin Group, an initiative to set interoperability standards, “not all requirements are detailed enough, which could lead to compliance confusion amongst the market demand (TPPs) and supply-side (banks).”
The Competition and Market Authority (CMA), a non-ministerial government department in the UK responsible for strengthening business competition, reached similar conclusions in August 2016. While a bill passed through the UK Parliament took effect on January 13, 2018, six out of nine of the biggest banks in the UK missed the deadline.
“All of the CMA9 [the nine largest banks in the UK, which account for almost 90 percent of the market] have different systems and ways of keeping information,” said Emma Byrne, spokesperson for Open Banking Ltd, a private body created in the UK to oversee PSD2 implementation. “While open banking will launch on the date specified by the CMA, some institutions will need more time in order to complete preparations for making open banking available to all of their personal and small business account customers.”
Consumer demand low … so far
Curran thinks the impact of PSD2 will not show until at least 2020-2021.“To what extent this affects the markets depends on customer demands,” he said, adding that demand has so far been small.
A 2017 study conducted by consumer group Which? found that 92 percent of the British public was unaware of open banking. In February 2018, CYBG found 58 percent of consumers had no idea what open banking is or that it has reached their doorsteps.
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As with GDPR, it is up to consumers to actively seek out the new rights and services available to them. Yet while individuals must consent to third-party use of their data in order to be offered new financial products, they’re less likely to trust new companies than they are to trust century-old brands.
“Research has shown that 40 percent of adults in the UK feel they’re not in control of their finances and a massive 19 million people don’t have an approach to budgeting that they feel works,” McNicol said.
Old banks, new games
To ward off new competition, banks have begun investing resources into developing their own application programming interfaces (APIs). HSBC launched its Connected Money app in May 2018. BNP Paribas plans to integrate a Swedish startup’s account aggregation technology into its app.
“They all want the same thing, to be the center of your financial life, but they are going about it in different ways,” said Josh Lindl, a consultant for BCS Consulting. “Banks so far have locked customers in and sell products: accounts, loans, cards and so on. With Open Banking, this model will be hard to achieve.”
Dan Scholey, the chief operating officer of the financial management platform Moneyhub said financial institutions could consider charging a subscription fee to other service providers. “We charge a subscription fee, and people appreciate knowing exactly what they are getting themselves into from the outset. We want to help people become better with their finances. That model really works, and that is where the market is headed. In our ideal world, we would give people who opt in to advertising a portion of that revenue to reward them fairly.”
“I have yet to see a successful [business] model for AISPs,” Curran added. “There will be a shakedown. App-only banks will come to market. Not all will survive. The sure winners are consumers and small and medium enterprises.”