EXCLUSIVE: “A slice of the action” – Alessio Castelli, CBI in ‘The Fintech Magazine’

As European regulators begin shaping a new era of API-driven open finance, Italy’s CBI is already positioning itself and its clients to reap the benefits. Head of Banking and Financial Market, Alessio Castelli, outlines the menu of options

If you imagine the EU’s second Payment Services Directive (PSD2) as a simple-but-classic margherita pizza, could the next iteration be a meat-feast-stuffed crust of possibilities beyond payments?

The Italian payment providers’ community and infrastructure provider CBI is preparing for just such a future, and is determined to guarantee itself and its clients a significant slice of it. It has seen API adoption and traffic across its CBI Globe open banking platform explode since PSD2 came into full effect in 2019, thanks to the directive’s success in boosting innovation by opening up the payments market to new entrants.

While it introduced the concept of open banking, it limited data sharing to payments information. Now, the EU is actively considering the introduction of a ‘PSD3’ to create truly open finance. To pave the way, the Commission carried out an open finance framework consultation last summer, and is gearing up to present a legislative proposal for an open finance framework in Q2 of 2023 for an update/review of the PSD2.

Similarly, CBI will make a case for the introduction of open finance in its Global Finance Report, which will be released on 23 March. Head of banking and financial market, Alessio Castelli, says: “The report will look at the evolution of open banking and open finance over the last two years, and present the best-in-class use cases, new companies and innovations developed by financial institutions, in Italy and across Europe, showing triple-digit growth in open banking services.”

Whatever PSD3 looks like, it is widely acknowledged that regulators will need to ensure any new rules provide a level playing field for incumbents, neos and fintechs alike, while protecting customers through better supervision. Castelli explains: “Open finance is a new paradigm within the finance landscape, an evolution of open banking aiming to allow end-users, corporate and retail, to utilise innovative services that better meet their needs through functionalities with wider scope than typical banking products, like personal financial management or wealth management.

“It also gives financial companies the opportunity for new commercial strategies, with upselling and cross-selling opportunities utilising financial data.”

Castelli says several factors are driving the open finance uptake, which is contributing to such hockey-stick growth. “The first element of open finance is regulatory, where market players must respect the mandatory rules defined by the authorities, as in Europe with PSD2 forcing traditional banks to open their systems to third parties,” he explains.

“The second is market-driven, where players drive different behaviours among end-users by selling new products offering great user experience and wide interoperability,” he adds. The European Commission’s efforts to facilitate open finance include its 2020 Digital Finance Package aimed at boosting market competitiveness for operators within the European Economic Area by prioritising digitisation in finance.

“In Italy, we also have the national competent authority, the Bank of Italy, which is offering support to market innovators through channels including Milano Hub and the Regulatory Sandbox,” adds Castelli. But regulation must be balanced with freedom to innovate, to realise the full potential.

“Market operators need to understand the rules well, while regulators need to understand the market’s needs and how the technologies are being produced,” he says. “CBI was selected, a few months ago, to join the Bank of Italy’s regulatory sandbox, initiated by the Italian Ministry of Finance, with a project called Invoice Control Database, which aims to become a central solution in Italy for invoice financing security.

“This is a huge opportunity for us, and the Italian market, to show all innovators how it’s possible to have strong conversations with our national competent authorities. In many ways, then, the move towards open finance is transforming the world of finance into the kind of collaborative ecosystem where players can contribute their specialist offerings to what becomes a layered solution. And third-party providers are becoming increasingly critical to making this happen.

Castelli says: “CBI could be seen as an industry utility, helping financial institutions, European payment service providers, corporates, fintechs, IT providers, and public administrations to respond more promptly and effectively to market challenges in the digital payments landscape. “We develop frameworks, technical guidelines and collaborative infrastructure around digital services, to help companies innovate from a B2B2C perspective.”

“Our main accomplishment has been creating a strong ecosystem of innovative players, collaborating to develop new services on a common technical platform”

And it is having to adapt fast to ensure its place at the table, particularly given current macroeconomic challenges and business behaviour, including operating beyond its own borders.

“CBI has to embrace new business models and collaborate more to increase its competitiveness,” continues Castelli.“Our main accomplishment has been creating a strong ecosystem of innovative players, collaborating to develop new services on a new technical platform. We’re also working hard to define technical and implementation guidelines, to allow wide interoperability.“We are also developing and offering microservices, mostly through REST API technologies which can be easily integrated with wider products or processes, allowing them to offer new functionalities with low effort and good time-to-market.”

With this ready-built ecosystem facilitating API connections between banks – both challengers and incumbents – and third-party providers, inside and outside Italy, CBI stands ready to extend its community. It aims to capitalise on the effect PSD2 has had so far in opening up the market, and has the appetite to do more.

Castelli adds: “Our Italian activities are focussed on the payment industry, and we have a strong role in supporting the companies involved, but we’re also being challenged to support businesses across Europe, and attracting interest from companies all over the world, including the United States.

“This is why we’re involved in developing new services like Name Check, a confirmation of payee (CoP) service, which will be widely adopted in the next few years,” says Castelli.“This is in addition to our Invoice Control Database, and we’re also drafting the new generation of corporate banking in Italy. And we also have an active role in the European working groups, shaping the future of open finance, through innovative use cases and digital services.”

More than 80 per cent of the Italian banking industry uses CBI‘s Globe platform, and 200-plus payment service providers have processed over 300 million API calls through it. Some 10 million citizens have used its CBILL service to pay 200 million bills and pagoPA payment notices, while its open finance ecosystem reaches ‘100 per cent of domestic current accounts and leading international platforms’.

It also supports 400 payment service providers; around three million Italian companies use its payment processing standards and ‘seven central public administrations have simplified access to the Italian financial industry.‘

A PAYMENTS REVOLUTION

CBI’s involvement in the national regulatory sandbox aims to eradicate the risk and cost associated with fraudulent invoices in the B2B2B space. Selected intermediaries and other third parties are also involved in the operational workflow, which is open to welcome new players. They are carrying out various operations in real time to see how these could be protected against mistakes and fraud, through REST API interfaces, with data flows protected by advanced encryption and using CBI’s technologies to create a centralised database of information related to advanced bills, from a multi-bank and multi-channel perspective.Ahead of its successor’s introduction, a 12-month, industry-wide EU consultation on the success of PSD2 was initiated by financial services commissioner in May 2022.

The commissioner wants to determine if the directive is achieving its objectives of opening up banking by forcing banks to allow their competitors access to customer data, reducing fraud with the introduction of new security measures, and cutting card transaction fees through a ban on additional surcharges for debit and credit card payments.

Hundreds of trade associations, businesses and individuals have so far responded, including the European Banking Authority (EBA), which said the benefits of PSD2 are starting to materialise, writing in its submission that ‘the security requirements – in particular, SCA – are having the desired effect of reducing fraud’, with instances three times higher for payments authenticated without SCA. Notwithstanding any teething problems that may have occurred, it’s widely recognised that PSD2 heralded a payments revolution. It increased competition and innovation in payments, and more than 2,700 new payment and electronic money institutions have been registered since it came into effect. The EBA has acknowledged that any future iteration should encompass pensions, insurance and investments. So, what finance functions have made up the largest proportion of CBI’s increase in API numbers over the past two years?

“Our analysis showed a 35 per cent year-on-year increase in the number of APIs offered by fintechs, the majority with commercial rather than mandatory applications,” says Castelli. “Ninety-five per cent of APIs have informative functionalities like account aggregation, with the other five per cent addressing payment initiations.

“And these APIs, of course, could be integrated within other fintech applications – for instance, personal financial management and savings management.”The report highlights a 93 per cent growth in the number of third-party providers operating within SEPA and a 130 per cent API growth in the last few months, with a strong increase in the adoption of the informative services.“So we are working on all these activities,” says Castelli, “to offer to our clients the best solution, the highest interoperability, and the best user experience.”

This article was published in The Fintech Magazine Issue 27, Page 11-12