PSD2 and developments in API technology are set to introduce open banking across Europe. What will this mean for consumers?
Insider knowledge helps us to anticipate the future. In fintech, rapid change in markets, technology and regulation make such knowledge even more valuable. Being up-to-date with current knowledge and best practices helps businesses and consumers to make the most of the benefits open banking offers, and to mitigate the risks incurred by the technology.
One reason why anticipating the future effects of PSD2 and APIs is difficult is because it will mean different things for different people. A new report by The Paypers, Open Banking & APIs Report 2017: A New Era of Innovation in Banking, leverages insider knowledge on open banking and APIs through compiling articles written by professionals from across fintech-related sectors.
Banks, non-bank financial service providers, industry associations, payments consultants and commentators are just some of the contributors to this report covering PSD essentials and emerging innovations.
The report aims to educate readers on current issues and showcase best practices in open banking. Part 1 of the report, PSD2 Essentials, covers the topics of accelerating digitisation, changing regulations and developments in API technology. Part 2, Innovation and Best Practices, focuses on digital transformation and culture change, artificial intelligence, new entrants to the market and business threats.
Open banking is transforming customer-centricity
Purchasing power is consumers’ main (or only) source of influence over business practices. In traditional economic models, business adjust their production according to shifts in end-user consumption.
With digitisation, however, consumers gain far more capacity to access different services, and–most importantly–information about products and providers. In the Paypers report, Vincent Brennan, Chair of the Open Banking Working Group of the Euro Banking Association, discusses the potential of open banking to increase businesses’ customer-centricity.
Brennan notes that while customer-centricity has been at the heart of business strategies for decades, the accelerating digitisation of financial services and changes in regulation are transforming customer-centricity entirely, because they put far more power into consumers’ hands.
Before financial services went online, consumers were generally limited to using services offered in their own locality. In fact, “high-street banking,” in which customers prefer to enter a physical bank rather than do their banking online, is still popular in the UK.
Today, however, consumers are increasingly using financial services online–and not only the ones provided by their banks. Consumers can access a range of services globally, including money transfer, currency conversion, banking, digital wallets, insurance, and more.
The new generation of digital financial services will take consumer choice to the next level. This is because API technology is allowing users to integrate services in ways that were not possible before (see API definition at the end of this article).
As Brennan describes, new financial technologies will increase consumers’ product choices, how they integrate financial services with their bank accounts (product perspective), and also open up their choice of service providers (distribution perspective).
Besides increasing choice, regulation aims to increase customers’ control over their data. According to interpretations of PSD2, customers will have the ‘right to be forgotten’ when they leave their service provider, and will also be able to take their data with them.
Essentially, consumers are no longer a captive audience. This shift in mode of customer-centricity is akin to a customer who has always depended upon their local friendly bookseller discovering that they can buy lots of different kinds of text in a global, online marketplace.
APIs will enable consumers to access a wider range of services and providers, compare services and their costs more readily, and control their own data in ways that are not currently possible. Theoretically, consumers’ transaction costs should be reduced, and their security and privacy control enhanced.
But there are various limitations to the benefits of open banking for consumers. On the other hand, some experts are concerned that APIs present ongoing risks to security and privacy.
Moreover, even though the technology aims to simplify processes, some consumers who are less technologically literate may face obstacles, such as if they lack sufficient understanding of how to control their data online.
As Gijs Boudewijn from the Dutch Payment Association notes in the Paypers report, a recent European Banking Authority (EBA) communication states,
“It is likely that it would be very difficult for consumers to understand the multiplicity of ways in which they could access their account information, depending on the providers and/or the interfaces used by those providers, and therefore to understand the implications of giving consent.”
Another limitation long noted by experts and financial institutions, such as Simon Lelieveldt and the NVB, is that financial products are known to be “dissatisfiers,” products that people aren’t really interested in, but which they must use to achieve other ends (e.g., paying for insurance online).
Brennan is correct that increasing digitisation has the potential to transform customer-centricity. But if people are uninterested in financial products, will they embrace the choice that open banking offers? Or will they keep using the same old products in the same ways as before? Which kinds of consumers will diversify their choices, and which will not?
To protect consumers and provide the most appropriate services to the right kinds of people, we need to return to these kinds of questions on a regular basis as legislation, technology, and service provision shifts and changes.
Shaping the future for financial consumers
By definition, no competitive market will ever be ideal for all players. The best that regulators can do is to avoid creating legislation that biases one player or another, while stimulating innovation, enhancing benefits, and mitigating risks for consumers and society at large.
To a certain extent, however, all parties involved in shaping the financial services landscape are operating in the dark. It is simply impossible to predict the future: we cannot foresee how consumers will respond, which service providers will come to dominate the market, or what new technologies will threaten data protection methods that we currently view as fool-proof. As Alexander Zwart, Senior Product Manager at Rabobank, states in the Paypers report:
“One can only understand and apply all these new innovations by playing close to the ball and understanding customers’ needs and expectations. It is no longer possible to say what the world is going to look like five years from now. In the past, bankers were ‘scenario thinkers,’ who ran the bank by making strategic choices far in advance. Today, we have to grant more space to short-cycle thinking and optionality.”
We can, however, anticipate the range of possible future events that might occur, and this will help us plan for risk mitigation while creating products and platforms that benefit society.
The way to anticipate the future is to pay attention to the diversity of opinions coming out of two important groups: the experts who work in or with financial services, and the consumers who use them.
By Erin B. Taylor, Senior Researcher at Holland FinTech
What is PSD2?
PSD2, or Payment Services Directive 2, is European Union legislation that will come into effect in 2018. The legislation aims to provide greater protection to consumers when they make online payments, encourage the development and consumption of online payments, and increase the safety of cross-border European payment services.
What does PSD2 mean for consumers?
A major effect of PSD2 is that it creates the possibility for consumers to access multiple financial services and information sources through Application Programming Interfaces (APIs). It promises to be game-changing, both in the way business collaborate to offer services to consumers, and in how consumers access and use financial services.