More than six months have passed since the initial deadline for compliance with the EU’s PSD2, designed to increase openness, convenience, and competition in consumer banking. There has been criticism that the foretold open banking revolution has been slow to get off the ground. But is that fair? What has been achieved so far, is open banking on course, and what does the future hold?
PSD2 - and the wider principle of “open banking” - have been presented as the thing that will finally open the door to solutions to the challenges facing the banking industry —competition, low customer switching rates, and lack of engagement— as well as giving customers greater control over their data and insight into their financial activity. But expectations of an instant revolution were always unrealistic, given the cultural and technical hurdles to be overcome by traditional banks as they transition into the new world of openness.
Digitally focussed banks like BBVA, and indeed the new breed of ‘neobanks’, have given tech-savvy early-adopter customers a taste of the sort of advanced features and services open banking is expected to usher in. For example BBVA’s house-buying service Valora uses Open APIs as a way to import third party data that allows people to make better, more informed, more data-driven decisions about a property they are thinking of buying before they start the process of purchasing.
But it was always going to take longer for these kind of developments to become widely available from the traditional banks.
Concrete achievements to date
Real-world innovations making it into customers’ hands have been relatively thin on the ground on the whole, as traditional banks have required extensions to the PSD2 compliance deadline in order to complete the complex cultural and technical shift to the API-centric approach dictated by open banking (which does not come naturally to them because of their organisational structures, legacy technology dependencies, and entrenched ways of working) and learn how to work effectively with the innovative fintech startups and other third parties that want to take advantage of those open APIs. The focus so far has (perhaps predictably) been on relatively simple applications, rather than radically innovative new products and services.
BBVA has taken a number of steps to prepare itself technologically, commercially and culturally for the new world of open banking — but from the outset the bank saw PSD2 as a positive potential for growth and the implementation of new opportunities.
"New regulation should be a spur to accelerate industry-wide collaboration on the standardisation of APIs"
For example, more than a year ahead of the directive coming into force, it launched BBVA API_Market, a platform providing companies and developers access to APIs from different BBVA entities around the world, as well as a sandbox environment in which to test innovation using those APIs. The bank has also invested in German banking-as-a-service platform solarisBank, which enables corporates and fintech startups to access the tools they need to launch banking and financial services offerings at a much lower cost and risk profile than building from scratch. Denizen, meanwhile, developed by BBVA’s New Digital Business unit, is providing fee-free international bank accounts for expats, built on open banking principles.
Lack of awareness
Consumers have, for the most part, not been clamouring for innovation, despite their best interests being at the heart of the push for open banking through PSD2. Overall, the industry has not always been able to effectively communicate the benefits of PSD2 and open banking to consumers. This has been particularly stark in the UK, for example, where only 18 percent of consumers are even aware of what open banking is, according to a report by PwC and the Open Data Institute. The same report suggests that there is still considerable attachment to traditional brands and ways of banking. Digital-first and digital-only challengers are yet to achieve anything like the brand equity and trust that incumbents enjoy, with just 20 percent of consumers saying they would opt for a challenger bank if opening a new primary bank account today. 32 percent said that the proximity of a physical branch was a key factor in their choice of bank.
Momentum is building
For all their struggles to get up to speed ahead of the original PSD2 deadline, traditional banks are actually emerging as the key enabler for the innovation coming out of fintech startups, which have often found it difficult to carve out a reliable route to adoption of their product or service on a mainstream scale. Accessing traditional banks’ large customer bases through integration via open APIs is crucial. But banks need to provide the APIs in the first place.
The indication is that —rather than the banks being laggards— the APIs are indeed there, and that engagement with them is on the up. There were 1.2 million uses of open banking APIs in June, according to the UK’s Open Banking Implementation Authority – almost double the figure of 720,000 from May. However, despite the promising numbers, fintechs still undoubtedly face obstacles when it comes to accessing and integrating with traditional banks that are still not set up to be “open by default” in the same way as digital challengers that were built from the ground up with API integration in mind are.
What’s on the horizon?
It will become all the more urgent to address this issue over the next 12 months, with the next major open banking deadline looming on 14 September 2019 with the introduction of the European Banking Authority’s Regulatory Technical Standards on SCA (strong customer authentication) and SCS (secure open standards of communication). These regulations will govern how banks permit access to customer data to the authorised third parties they integrate with, and stand to be a major block on innovation if banks are not suitably prepared.
These new technical standards will make it more important than ever for banks and fintechs to be able to access APIs through controlled marketplaces and development platforms that enable experimentation and innovation to take place first in an convenient and compliant “sandbox” environment. Additionally, the new regulation should be a spur to accelerate industry-wide collaboration on the standardisation of APIs to make the process easier for all parties.