Exclusive: ‘Opaque or opportunity?’ – Ado Fazlic, Neonomics in “The Paytech Magazine”

Ado Fazlic, Head of Marketing at Neonomics, observes the rollout of PSD2 in Norway and ponders what the ‘o’ in open banking really stands for

If you look back at some of the press surrounding the initial roll-out of the revised Payment Services Directive (PSD2) in Europe and the UK, you would assume that we were on the precipice of an era-defining change. The open banking (OB) environment it created was being heralded as a potential cure-all for many of the missed opportunities lurking in the dusty corners of financial services. Better access to data would enable new companies to revolutionise the way consumers across the globe interacted with financial services and, in turn, the world would become a better, happier place.

Fast-forward three years and the reality across Europe is a bit more complicated. Brexit aside, the UK has taken the most tangible steps to create and foster a collaborative environment to harness the potential power of open banking initiatives. It is far from perfect, but the numbers do not lie.

According to the UK’s Open Banking Implementation Entity (OBIE), around three million UK consumers and businesses now use open banking-enabled products to manage their finances, access credit and make payments. That may not sound like a lot, but it is important to note how this has evolved. API call volume has increased from 66.8 million in 2018 to nearly six billion in 2020. This is quite a big jump in a relatively short period of time, considering the various forces at play that are both enabling and, to a degree, stalling this growth.

This incremental progress didn’t magically happen: the path was mapped by major stakeholders, working closely together and aligning over shared self-interests. The biggest banks in the UK, representing the vast majority of all account holders, supported the initiative out of a desire to meet the evolving needs of customers, among whom an alarming number were beginning to ask some fundamental questions, such as ‘why have I banked with the same bank for so long?’. And even ‘why do I need to use the same bank as my parents?’.

UK regulators saw the open banking initiative as a potential differentiator to reinforce London as the financial capital of Europe, post-Brexit. Big tech and new entrants, meanwhile, saw the data recently unlocked by open banking, which was sitting unused, as a gold mine waiting to be tapped to create services and eye-watering valuations.

Northern Lights

In the UK, open banking in 2021 is starting to look like we imagined it would in 2018. But what about the rest of Europe?

Neonomics is based in Norway and we are a country that prides itself on being an open society. The five million or so Norwegian consumers tend to be more digitally savvy then most other Europeans when it comes to financial services. The top five banks in Norway, much like in the UK, account for the majority of all accounts and the largest of them, DNB, has played a leading role in rolling out digital financial services to all Norwegians, not just its own customers, partly thanks to its backing of Vipps, the country’s only peer-to-peer payment app, which has seen widespread adoption.

The banks saw investing in PSD2 compliance as a way to streamline and modernise operations while creating an ecosystem for innovation that could be tapped to address arising opportunities. The banks, on paper, were all in. Norwegian banks‘ websites feature blurbs about their commitments to open banking and fair and equal access to data.

But one undercurrent that has recently rippled to the surface is lack of access to bank APIs and the apparent reluctance of regulators to take on the nation’s largest financial institutions over potential PSD2 infringements. A highly-motivated fintech community, which is seeing its burgeoning business propositions delayed because the flow of data it was expecting from banks has proven much harder to access then envisaged, is pushing for greater scrutiny.

A new organisation, Fintech Norway, was recently formed to highlight these issues and push for Norway to create something similar to the UK’s OBIE. Speaking about the situation, Chris Andvig, CEO of Oslo-based bank API aggregator and founding member of Fintech Norway, Neonomics, says: “We were among the first in Norway to begin building our business around the opportunities presented by PSD2 and API aggregation. We consulted extensively with the regulators and the banks, and were the first and the only company to secure a payments institution licence to operate as a regulated entity in this environment. We did everything by the book and, unfortunately, there are still banks in the region that do not have adequate accessibility in place, and require much more heavy lifting from our side to enable and maintain access.”

The apparent lack of accountability raises questions as to whether banks’ lack of proactivity has a tangible, negative impact on consumers. Part of the foundation of the PSD2 mandate was to foster competition and innovation in payments. More competitive offerings typically result in consumers getting better deals and services. But, at present, the Norwegian market has seen consolidation of service providers under single entities with little room for new entrants to gain a foothold. Vipps is an example of that. Built by banks for banks, it is meant to be a stand-alone organisation, treated like any other fintech. But, because of its backers, it has greater access to the very data supposed to be shared with all fintechs.

Why hasn’t there been a bigger public pushback against this preferential arrangement? Probably because the average consumer has only recently started experiencing the benefits of open banking solutions; faster and more streamlined payments, easier and more responsive financial management tools, and increased access to a wide range of niche investment platforms have all been built via APIs connecting customers to their bank accounts in third-party platforms at much lower transactional costs than established offerings.

But fintechs big and small are demanding change because, not only are they legally entitled to access this data flow, it is in the entire ecosystem’s interests to make access as functional and reliable as possible. Fintech Norway has submitted formal requests for a review to the Ministry of Finance, and the Norwegian Financial Supervisory Authority (FSA) is in ongoing dialogue with multiple stakeholders. The banks have responded, and have started to make changes, but time will tell if this has a lasting impact on the status quo.

‘O’ FOR OPPORTUNITY?

Stakeholders across the ecosystem can agree on two things: the opportunities open banking can enable are immense if managed properly, and that change is happening, albeit slowly. In Europe, banks have obligations to comply with PSD2 and existing levels of compliance have been achieved in a variety of ways: banks following the rules to the letter; banks working with service providers to find quick and dirty solutions; and regulatory flexibility.

At present, the environment has almost exclusively benefited specific solution providers, who make their money from the banks’ lack of flexibility. The downstream benefits have not yet hit critical mass, but as reduced transaction costs continue to proliferate, the potential to upend the status quo is becoming more realisable.

Depending on who you ask, the ‘o’ in OB can stand for different things. Optimists might see it as ‘o’ for official, as in the official way financial services should be operating. For the rest of us, money talks, and whatever side of the fence you are on, there is a need to fight for position. The mere fact that so many actors across the ecosystem are jostling for that shows the ‘o’ is for the opportunity open banking represents, even if the implementation is still a bit opaque.

This article was published in The Paytech Magazine #08, Page 62-63