What is Open Banking?
Open Banking is probably the most disruptive change in the entire history of banking.
Today, banks act as monoliths, since they were never motivated to share or exchange information with third parties. This happens for obvious security reasons, but the business environment is changing dramatically, so legislatures are taking measures to keep up with new business models.
Policies like the GDPR in the EU have laid the foundation for new ways of managing and protecting data.
Consumers have the power to decide what information they share, and with whom. GDPR is a consequence of changes occurring over time with how we send and manage our data. The old Data Protection law in place since the ’90s got outdated by today’s reality in data usage.
What is Open Banking?
Open Banking is a secure way to give providers access to your financial information.
It opens the way for new products and services that could help customers and small to medium-sized businesses get a better deal. It could also give you a more detailed understanding of your accounts, and help you find new ways to make the most of your money.
The FinTech sector in the UK and Europe has grown tremendously in the past few years. Financial services are increasingly favorable for the customer, with providers regulated by the Financial Conduct Authority (FCA) and European equivalents.
Open Banking Initiative
What happened with data protection laws is now happening with the payments sector.
The story begins with regulation from the European Commission in the form of the revised Payment Services Directive — more commonly known as PSD2.
The first PSD was published in 2007 and transposed into UK law as the Payment Services Regulations in 2009. PSD1 was an important text; it regulated payment services and PSPs throughout the EU and EEA. The directive’s purpose was to increase pan-European competition and participation in the payments industry, including the involvement of non-banks, and to provide for a level playing field by harmonizing consumer protection and the rights and obligations for PSPs and users.
In line with the review clause in PSD1, the European Commission issued a proposal for a revised Payment Services Directive (PSD2) in July 2013. Publication of the final text in the Official Journal of the EU was due in December 2015, with entry into force 20 days later (i.e. January 2016). Member states are required to transpose PSD2 into national law by, and apply the majority of the provisions from, two years after entry into force of the directive.
The revised Directive on Payment Services has been adopted by the European Parliament in October 2015 and by the European Council of Ministers in November 2015. The PSD2 aims to enhance consumer protection, promote innovation and improve the security of payment services within the EU. It was published in the Official Journal on 23 December 2015 and entered into force on 13 January 2016.
EU member states had until 13 January 2018 to implement it into national laws.
Open Banking: New Map for the Banking Territory
PSD2 came into force on 13 January 2016, from which date member states had two years to transpose it into national law.
According to the European Commission, PSD2’s main aims are to:
• contribute to a more integrated and efficient European payments market
• level the playing field for payment service providers (including new players)
• make payments safer and more secure
• protect consumers
• encourage lower prices for payments.
Under PSD2, institutions wishing to act as Payment Initiation Service Providers (PISPs) or Account Information Service Providers (AISPs) must be authorized payment service providers (PSPs).
• Extension of regulated transactions: Scope of regulated transactions has been extended to transactions in any currency and ‘one leg out’ transactions.
• Stricter customer authentication: Payment Service Provider (PSP) are obliged to ensure stricter customer authentication every time the payer accesses his payment account online, initiates electronic remote payment transactions or performs any other action through remote channels.
• Internal dispute resolution: Execution and application of adequate and effective complaint resolution procedures setting out maximum processing time for the resolution of customers’ complaints.
• Payment initiation services: PSD2 regulates payment initiation service providers (PISPs) and the initiation of payments. In this context, PSPs domiciled in the
EU states are obliged to provide secure communication facilities, inform PISPs about payment initiation, and treat all initiated payments equally.
• Account information services: The access to the payment service user’s account has to be granted to third-party providers for account information aggregation services. PSD2 regulates the duties of the account information service providers and those of the PSPs.
The revised Payment Services Directive (PSD2) improves the level of customer protection and increase competition in the EU payments market.
Benefits of Open Banking
· Works well with online and mobile banking. It could help you budget, find the best deals, and shop for the products and services that suit you. You can choose to give a FinTech or bank secure access to your current account information.
· Quick, easy and direct payments. With Open Banking, payments are performed directly from your bank or building society.
· Shop around. Open Banking could transform the way we use price comparison websites: if you choose to give a regulated price comparison website access to your account information, you’ll be able to get results based on what you actually spend.
· Innovation made safe. Some apps and websites currently use screen-scraping, which involved you giving them your login details and password so they can login to your account and analyze your financial information or make payments on your behalf. With Open Banking, you’re never asked to share your password or login details with anyone other than your own bank or building society.
· You’re in control. You can choose which services you use, and which providers you allow to access your information. You even decide for how long you’d like them to access your data.
· Government-led change. Open Banking is designed to bring more competition and innovation to financial services. It was set up by the Competition and Markets Authority on behalf of the UK Government.
Open Banking is one of our main focuses, as our aim is to create a global blockchain payment network, facilitated by Open Banking and API technology.
If you want to learn more about ZoidPay make sure to follow us on our social channels below because our next article is going to cover the Open Banking Standard, what are its participants and how banks will adapt to the new sharing economy.