Addressing the differences between Open Banking and PSD2
By Marcus Hughes, Director of Business Development, Bottomline Technologies
In January, we saw the launch of the European Union’s Second Payment Services Directive (PSD2) and the UK’s own Open Banking initiatives kicking-off what many hail as a financial services revolution. Both initiatives promise to drive innovation in banking and payment services, by making it easier for customers, banks and other third-party service providers to securely share data with each other and capitalise upon the opportunity.
For financial decision makers, these initiatives have the potential to increase efficiencies, and create new opportunities and approaches. For example, we can expect that Open Banking will make it easier to use Faster Payments in the UK on a multi-bank basis. Other planned initiatives such as Request to Pay, are anticipated to give invoice-payers greater choice and flexibility in the way they do business.
Although it is still early days, both initiatives are already rising on the financial decision makers’ agendas. Our recently published UK Business Payments Barometer found that both initiatives are recognised by UK financial decision makers as the third greatest driver of change in business payments for the next 12 months. In fact, the report also found the largest enterprises surveyed are increasing their investments in bank-agnostic technology – suggesting they are already gearing up for the increased competition and transaction volumes expected with the advent of Open Banking.
Yet to truly embrace the benefits these initiatives are set to offer, we must first understand the similarities, the difference between and the implications of Open Banking and PS2.
The scope – The scope for Open Banking’s adoption is only mandatory for the nine largest providers of current accounts in the UK (HSBC, Barclays, RBS, Lloyds, Santander, Nationwide, The Co-operative Bank, and Bank of Ireland) – also known as the ‘The Competition & Markets Authority Nine’ (CMA9). Although it is worth noting that progressive challenger banks have been quick to voluntarily jump on the opportunity.
However, the EU-driven initiative PSD2, goes further than Open Banking and applies to all payment account providers throughout the union, regardless of the organisation’s size. Depending on the geographical coverage of an organisation and where banking relationships lie, it is important that financial decision makers understand where these initiatives touch their organisation.
The common standard vs market defined standards – Open Banking is underpinned by a pre-defined, single Application Program Interface (API) which has been implemented by the top nine banks. This makes it easier for third party providers to connect to bank account data, with the customers’ permission, to deliver new services.
Within this open environment, corporates, especially those that enjoy multiple bank relationships within the UK, are likely to benefit from more convenient payment management across different banks via a centralised platform, enabling more effective cash management.
On the other hand, the EU has left technical details of PSD2’s APIs open to the market to define. This means we are likely to see disparate groups of standards driven by consortiums of European banks and third-party providers, that could potentially limit new services to clients of specific banks. One example is the Berlin Group, consisting of 40 banks, payments associations and Payment Service Providers (PSPs), which has been formed to define a common API standard called NextGenPSD2. This is only one of several other initiatives that have also been set up in Poland, Slovenia and France.
It remains to be seen how such standards will evolve across the EU, and if the UK’s Open Banking standard might even become the API of choice in Europe. Either way, as we begin to see PSD2 innovations hit the market, financial decision makers should engage with their banking relationship managers to understand if there are any limitations in accessing and benefiting from these new service offerings.
Compliance – Although the EU’s Regulatory Technical Standards (RTS) for PSD2 have been published, the EU Account Servicing Payment Service Providers (ASPSPs) payment institutions still have an 18-month transition period to comply.
Because of the relatively long implementation period, European banks have been slow to adapt since Open Banking went live in mid-January. In contrast, within the same timeframe most of the UK banks were compliant by the Open Banking deadline, with the exception of a few banks that were granted short grace periods to catch-up. As a result, businesses with multi-banking relationships in the UK and Europe are likely to see new services being made available in the UK sooner than in Europe.
But despite these differences, there is no doubt that financial makers can look forward to an exciting wave of new business payment and banking services. To embrace the opportunity, it is important financial decision makers stay informed and know the right questions to ask their banks and internal stakeholders.
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