EXCLUSIVE: “Open Season” – Tim Goodfellow in ‘The Fintech Magazine’

The European finance ecosystem is readying itself for a new legislative framework that will determine how it moves from purely transaction-based open banking to truly open finance. Tim Goodfellow listened to what you make of the proposals

Regulations are constantly evolving to support or, in some cases, keep up with innovation in financial services. A third iteration of the EU’s Payment Services Directive, the key legislation covering how payments happen in Europe, has been coming for a while, and, at the end of June, the European Commission officially announced it as part of a larger package of financial reforms.

The proposals include a new Payment Service Regulation (PSR) and a financial data access framework (known as FIDA) and a pathway to the digital euro, some of which could be implemented as soon as 2026. Collectively, these measures could facilitate the transition from ‘open banking’ to true ‘open finance’, in which a broader range of financial information will be more readily available to third parties.

PSD2 has widely been seen as revolutionary once full implementation took hold in 2019. By unlocking payments information and encouraging banks to share data with the ecosystem, it’s stimulated new business propositions and services for consumers. It paved the way for open banking, but, ultimately, shared data was limited to payments information.Almost as soon as it was implemented, it was time for an upgrade.

The reforms proposed by the European Commission on June 28 this year aim to remove the remaining obstacles to providing open financial services, improve customer control over payment data, and further combat and mitigate fraud. The goal is admirable – to provide more space for innovation, stimulate competition and foster financial inclusion for consumers.

“Open finance represents an important intermediate stage in the direction of open x, a paradigm that will lead financial players to exploit new business levers for the benefit of their end customers “

Liliana Fratini Passi, CBI (Italy)

The data access framework is an interesting addition, which outlines the conditions and requirements for sharing and using that data, including making it easier for customers to grant and withdraw permission for data access. It also allows data holders (i.e. the banks) to charge for making data available to third parties. These proposals will change the rules of the game once again and shift the boundaries of what’s possible. Sentiment towards the proposed changes is positive. An inevitable wish list resulted from the past four years under PSD2 and it would appear a lot of that is being fulfilled.

Cross-border payments should become even easier and financial products more accessible because the necessary data required for delivery will be more readily available.Laying out the reforms, Valdis Dombrovskis, a spokesman for the European Commission, highlighted some of the ways the reforms could help both providers and customers.

“Previously burdensome processes, such as comparison services or switching to a new product, will become smoother and cheaper, including, for example, automated processing of mortgage applications,” he said.

Indeed, the ability for consumers to see financial data, such as investments and insurance policies, in multiple places, in the same way that they can see their transactions in multiple apps, could have major implications for integrating new services. According to Dombrovskis, SMEs also will be able to access a wider range of financial services and products, such as more competitive loans resulting from their creditworthiness data being more easily accessible.

Overtly positive responses to the proposals that we heard included from a Mastercard spokesperson who told us it welcomed the EU Commission’s initiative to provide consumers with broader access to their financial data, while protecting their privacy rights and maintaining a level playing field among all participants. CBI in Italy is a consortium of 400 banks and other stakeholders in the payments industry. Managing director Liliana Fratini Passi laid out how it had been impacted by existing developments and what could happen with PSD3.

“PSD3 paves the way for banking and non-banking fintech operators to offer niche and complex products that can leverage financial information other than account balances and movements,” she said. “Moreover, this further step towards open finance represents an important intermediate stage in the direction of Open X, a paradigm that will lead financial players to exploit new business levers for the benefit of their end customers.”

European challenger bank unicorn N26 also welcomed the new proposals. “At the moment, poor or limited data access, as well as unmodifiable customer journeys, are still major obstacles to fully unlocking the benefits of open banking for all European consumers. This limits competition in the European market for financial services,” it told us. “PSD3/PSR together with FIDA will serve as a catalyst for further competition and innovation. We welcome the proposed regulation to improve consistency of law and stronger enforcement across Europe, as well as the strengthened requirements around open finance.”

“We’re supportive of proposals that ensure a baseline of data remains freely and securely available to authorised third parties whilst also encouraging the growth of a premium service market through commercial incentives s”

Tom Burton, GoCardless

One criticism of PSD2 has been that the quality of integrations and APIs has varied and that not everyone has been on board with the drive for innovation.

Jan van Vonno, head of industry and wallets at open banking platform Tink, acknowledged that progress after PSD2’s introduction had not been as quick as many had hoped. “So the renewed drive that PSD3 and the PSR provides is a welcome addition to the development of open banking in Europe,” he added. ”We hope that the PSR in particular, will resolve much of the controversy surrounding API quality that is present under PSD2.”

That was echoed by Martin Herlinghaus at payments platform Aevi, who reflected on the struggles that new entrants in the wake of PSD2 had experienced. “Many open banking startups pushed against a group of incumbents that were not prepared or willing to raise their game, as they felt forced to comply rather than engage in a potential new business opportunity for them,” he said. “All of this resulted in tremendous progress, but somehow a lack of consumer adoption.”

He hopes PSD3 will not just level the playing field, but create a better team dynamic. There are, however, some concerns, particularly around attaching a price to data access. If banks are permitted to charge a third party, it may impact those companies’ business models, particularly startups. Could it be a drag on competitiveness and innovation? Herlinghaus mostly believes the potential for data transfer to have a fee attached is ‘a good thing, as data is a highly valuable asset and requires the necessary safeguards to be protected, which costs money.’ He does however caution against the danger that ‘certain providers could use the charging model as an unjustified toll for third parties to secure their own position.’

Tom Burton, director of external affairs and public policy at GoCardless is optimistic.

“We’re supportive of proposals that ensure a baseline of data remains freely and securely available to authorised third parties (with the customer’s permission) whilst also encouraging the growth of a premium service market through commercial incentives,” he said. ”We see this as the best route to creating an innovative, sustainable open banking ecosystem in Europe that’s good for data holders, fintechs and – most importantly – customers.” He also noted the need for new regulations and stressed their tougher enforcement.

“At the moment, European open banking users receive an inconsistent experience that is more prone to glitches than is ideal. By making the performance and functionality rules for open banking interfaces tougher and more standardised, and improving implementation and enforcement, the EU will be making very positive strides forward to addressing these issues and driving trust and customer adoption of open banking.”

“It is frustrating to see that the opportunity to directly address 3ds within psd3 hasn’t been taken”

Galit Shani Michel, Forter

Galit Shani Michel, VP of payments at customer authentication provider Forter, praises the positive impact this wider access to data could have on fraud risk and detection.

“Ensuring sharing of data between organisations is as easy as possible should increase the number of approved legitimate transactions and drive down the rate of false declines,” she said, which has a significant impact on customer retention and loyalty. However, she points to a missed opportunity surrounding customer authentication.

“The number of persons excluded from using 3DS [the widely-adopted mechanism for customer authentication] is far higher than it should be. PSD2 was designed to improve accessibility and inclusion in payments; yet the high friction levels for the elderly, digital nomads, or those who are not wholly comfortable with technology and shopping online, is concerning.“It is frustrating to see that the opportunity to directly address 3DS within PSD3 hasn’t been taken.”

Speaking on a recent episode of the 11:FS podcast, fintech commentator Sarah Kocianski praised the ambition of the European regulators but remarked that they are largely moving in line with innovation rather than ahead of it – and the greatest innovation in banking and financial sectors is typically happening in regions where the regulator takes a more hands-off or localised approach.

Nilan Peiris, chief product officer at Wise, observed that ‘regulations are good for setting the direction, but a lot of hard grunt work is required to drive the change’.On that note, whatever the reaction to the proposals, the reality of how they work in practice, could look very different once they’re implemented, which is unlikely to be any earlier than 2026 and, based on experience of PSD2, could be later than that for a lot of organisations.

Having been seen to lead the way on open banking when part of the EU, what the UK does in response to these changes is, as yet, an unknown. Time will tell what is and isn’t implemented from them. Meanwhile, in Europe, it’s still business as usual for another few years at least.

This article was published in The Fintech Magazine Issue 29, Page 44-45