• Nicole Green, VP of Product Strategy and Operations at Yapily


• 04.07.2023 04:00 pm
#openbanking #innovation

The EU Commission’s draft legislation for the future of payments in the European Union (EU) has been split into two main outcomes: the Third Payment Services Directive (PSD3) and Payment Services Regulation (PSR). As a payment institution (PI), we’ve been looking forward to the publishing of PSD3 and, in particular, its impact on open banking. Now that I have personally read through all 250 pages of the payments and financial data access legislative package, which also includes plans for FIDA, the open finance regulation, there are a lot of meaty details that explore how the legislation will affect open banking…

But the question is – does it go far enough?

Promising incremental changes

In answering this question, I’d like to start by calling out that it’s incredibly positive to see several incremental improvements that will push open banking forward consistently across member states of the EU. From an industry standpoint, this includes the prohibition of contracts being maintained, meaning that current open banking functionality will remain free. This is important to help spur on adoption across the region.

Improving the experience for customers is also a focal point of the consultation’s report, with calls for financial service organisations to remove any current ‘frictions’ so that the open banking payment journey is as seamless as possible.

It also sets out the requirement for banks to use an open banking API, rather than capture data using screen scraping, which will make data sharing for their customers so much more secure. Aligned to this, banks are being tasked with implementing a consent dashboard for their customers so they can see exactly which third party connections have access to their data and easily manage them.

This puts more control into the hands of consumers. And serves an important purpose as our own research found that nearly one-third of decision makers in financial services organisations believe trust in data sharing is the biggest barrier they face as a company in driving adoption of their open banking services and products.

All of these changes will help to spark greater competition in the open banking space and should drive further adoption across member states.

But.. the devil will be in the detail

However, there are some areas that remain quite vague and detail on the regulation remains too high-level. So, it’s difficult to understand how it will work in practice, which brings into question what its true impact will be.

To give you an example, a key area where I’d argue we need greater guidance and governance is calls for improving payment status and error notifications. This would require banks to communicate better with a Payment Initiation Service Provider (PISP) if an open banking payment failed, for example.

In this instance, I would argue that the European Banking Authority (EBA) – which has been tasked with providing additional detail to member states through the Regulatory Technical Standards for a number of points in the PSD3 proposal – will need to take the responsibility of providing greater clarity for banks on what is expected and enforce it.

For open banking payments to soar, banks need to deliver the same fast payments experience that consumers have when using their cards, as well as an overall slick user experience to generate a high conversion rate. And if the EBA doesn’t help banks get this right, it will just act as another blocker to adoption.

Two lost opportunities for innovation?

I would argue that for all its promising changes, there are two areas where the consultation should have gone further to spur on open banking innovation.

Although it’s great to see incremental changes in the proposal that will drive some consistency across member states, it is somewhat disappointing to not see a stricter implementation of API standards.

Instead of the ‘parity principle’, which is referenced in the proposal, we would rather have preferred to see a baseline set of standards laid out that would have set us on the path to harmonising open banking across the EU. Creating a clear zone for innovation would have avoided what will almost certainly end up being the reality: fragmented APIs that make it harder to offer a consistent service due to banks’ different customer interfaces.

Secondly, we would have also liked to have seen more thought on the commercial use cases for open finance from the Commission. At a high level it sets out what industries will be in scope for open finance, and that it will be managed and steered by “Financial Data Sharing Schemes”, which will create common standards and allow for compensation for data holders. But, the caveat here is that the proposal currently only provides for ‘read access,’ so participants will only be able to retrieve data, as opposed to having ‘write access’ which can power more valuable actions, such as being able to open and close accounts programmatically. This needs to shift so that the sector has the tools to develop and deliver new financial services and products to consumers.  

Final thoughts

PSD3 is of course so much bigger than open banking. But, we are very encouraged to see a step in the right direction that will help to power further adoption and innovation across the EU, which will ultimately help to deliver better financial services and products to consumers.

We’ll no doubt see amendments being made as it makes its way into law, which has a deadline of  April 2024 in advance of the EU elections. We will be playing our part by sharing our knowledge and experience through the Open Finance Association, and pushing for open banking best practice that will drive further, consistent uptake across EU member states.