Open Banking and PSD2 Uncertainties

The use of APIs in banking has largely been limited until recently, mainly due to regulation and security. However, European banks will soon be using APIs to provide access for third-party providers, as one of the many changes required by the upcoming the Second Payment Services Directive (PSD2).

A new report by PwC highlighted that banks are concerned that these changes will cause them to lose control of their customer interface.[1] A vast majority (88%) of the banks surveyed in the report believe that PSD2 will have an impact on their business and many see it causing them to change their strategies. Despite the uncertainty and the apparent risks, 44% are planning on providing an open bank offering, with 66% intending to integrate foreign products or functionalities into their own digital offering.

The report demonstrates that PSD2 is going to shake up the banking and financial services industries and, despite some uncertainty over the wider expectations, banks realise that they are going to have to embrace such change, or face being left behind.

The report concludes that “The only truly relevant question for European banks at this juncture is whether they will choose to lead and shape the future of open banking or be reduced to regulation-bound providers of commodity services to other, more visionary companies.”

PSD2 requires European banks to introduce application programming interfaces (API). APIs are becoming increasingly popular amongst technology companies. For example, Uber has been successfully integrating partner capabilities via APIs; it uses the Google Maps API to locate customers and track drivers, and PayPal’s Braintree API for payment

Although the UK’s financial services industry is aware that PSD2 is coming, it is still not any clearer about the implications of it and the uncertainty that surrounded the Directive still lingers.

Indeed, European banks need to embrace the changes that PSD2 brings, and lead the way in the future of banking. Fintech companies also need to play their part, creating solutions that work with banks, rather than against them. Integrating seamlessly with the banks existing infrastructure, to bring them up to speed with the requirements of new regulations, such as PSD2.

PSD2 isn’t the only initiative that seeks to bring changes to the UK’s banking sector. A recent Competition and Markets Authority (CMA) report has has announced significant reforms that are aimed at bringing more transparency for consumers, open APIs and easier account switching. However, unlike PSD2, the report isn’t legally binding and it remains to be seen what changes it actually brings about.

[1] Strategy& PwC report –  Catalyst or threat? The strategic implications of PSD2 for Europe’s banks