Which European banks and fintech companies have switched to open banking, what do they expect from their projects, and why the implementation of the directive is a contradictory and complicated issue?
PSD2 is a directive that promotes the idea of open banking. Its main goal is to simplify access to financial services and increase competition among the players in the financial services market. In simple words, the directive promotes the possibility of managing accounts in different banks with the help of only one application. Moreover, it wants to make it possible for clients to plan their budgets and choose suitable credit conditions, without worrying about the integrity of their sensitive financial data.
September 2019 is the deadline by which financial institutions must bring their activities in line with the directive. Let’s consider which companies have already moved to the new standard.
How is open banking implemented?
In 2018, HSBC launched the Connected Money application. It gives its customers access to account information in 21 banks, including Santander, Lloyds, and Barclays.
The application managed to attract 300,000 clients in a single year. Overall, the consumer response was positive.
Raman Bhatia, Head of Digital, UK, and Europe at HSBC, says that eventually, Connected Money app’s clients are more interested in the ability to get more information about their expenses. This is what helps them to experience the benefits of financial coaching.
For example, you can categorize your expenses in the app and check on your account balance (after you have paid your bills). Moreover, you can get financial advice.
In the long term, HSBC will augment the pool of partners. The possibility of using customer data and artificial intelligence to expand access to credits is also being considered.
Raman Bhatia also said that HSBC management believes that the long-term vision of the banking sector is about providing contextual access to credits, which is not tied to the products per se. This is quite possible; however, they would need the help of open banking and AI.
In March 2019, the payment service provider Klarna announced the launch of its own Open Banking platform.
The Klarna solution allows merchants to access the consumer’s bank account at the checkout stage and initiate a transfer after the client enters the password for their account. This platform will provide access to more than 4,300 European banks through the API.
Sebastian Siemiątkowski, board member and CEO of Klarna Holding AB, believes that consumers are ready to switch to open banking, and it is much easier today than even a couple of years ago. This means that if any player does not provide the consumer with decent and modern services, they will switch to competitors’ institutions in a second. He also called it an unprecedented situation for the banking sector, and has assured that it will cause a big stir soon.
Swedish startup Tink has been implementing open banking standards since 2013, long before the PSD2 directive came into force.
Initially, it was a financial app for consumers, which united bank accounts from different financial institutions within one interface. Later, the company shifted to the b2b segment, allowing banks and fintech startups to integrate this solution into their apps.
More than 1,400 developers from hundreds of banks and financial institutions in Europe (including NatWest, BNP Paribas, Nordea) use the API Tink platform to access financial data. Tink provides aggregation of accounts of various financial institutions, initiation of payments, personal finance management, and data collection. For example, the last two functions will be integrated into the NatWest mobile banking application.
The bank will be able to offer personalized insights about expenses based on customer transaction history.
In early June 2019, this startup attracted PayPal investment ($11,2M). The payment giant plans to use Tink to make it easier for new customers to connect bank accounts to their PayPal ones. What’s more, the solution can be used to analyze transactions during lending decisions.
Daniel Kjellén, CEO and founder at Tink, says that PSD2 levels the playing-field, democratizing access to consumer financial data and allowing new players to enter the market. Nevertheless, there are a lot of problems in the short term. Finding the right staff, upgrading IT systems and complying with regulatory requirements are the most serious challenges that open banking faces today.
The complexity of open banking
Despite the fact that the new legislation has been discussed for a long time, most people are not aware of the upcoming changes and, at best, have received a letter from their bank with incomprehensible information about APIs. And as for financial institutions, not all of them have implemented new standards. The study showed that 41% of EU banks did not have time to fulfill the PSD2 requirements.
The implementation of PSD2 implies that banks will comply with a number of regulatory requirements. They have to create mechanisms that will allow third-party providers to cooperate with banking services and data safely, reliably and quickly, not to mention the consent of their customers. Technological difficulties are one of the major reasons for that. Ideally, banks would have to completely revise their existing technological background, and create a transparent system that will meet all the requirements of open banking. But this is impossible because a bank needs to keep serving customers using existing systems. Therefore, modernization often runs parallel to the core business. Thus, consumers and bank employees can be unaware of ongoing changes.
However, over-regulation of the industry, which, in turn, affects the development of the trend, is another issue. If PSD2 ultimately implies the open data concept, along with new opportunities for integration, then the requirements of other departments make financial institutions more defensive and “closed”.
For example, new anti-money laundering and deoffshorisation requirements are forcing banks to implement more rigorous client verification. This, in turn, will entail refusals of opening accounts for companies from around the world. Therefore, banks can consciously pay less attention to open APIs, justifying it by saying that they risk violating compliance policies and protecting against risks.
Moreover, the open banking concept requires a more responsible approach to data security. After all, opening the API, banks allow fintech startups to access their customer data. Of course, this happens only with their consent and is governed by an EU data protection regulation (GDPR). However, this regulation is not much less complicated than the PSD2 directive per se. Even a year after this requirement came into force, not all companies (to which this claim corresponds) entirely understand the consequences.
A survey, conducted by the law firm Paul Hastings, revealed that only 43% of the largest companies in the world had already managed to create an internal team, specializing in implementing the standards of GDPR (not to mention bringing all business processes in line with it).
Finally, European financial institutions see open banking as the largest current threat, if we are talking about their business models. No less than 56% of them are afraid that open banking concept will result in the loss of consumer loyalty to these very banks. After all, they will have the opportunity to choose between a bank and a fintech startup, and the latter is often ready to offer a more flexible and cheaper service.