As the EU’s Open Banking Directive takes hold, John Powers, CSO of Findora, a confidential network protocol that enables the seamless, secure, and fully compliant transfer and verification of financial assets, explores how it will change the global financial experience.
Four years in the making, a key piece of EU financial regulation the revised Payment Services Directive, came into effect last month. The legislation known as PSD2 was adopted by the European Parliament with the goal of creating safer and more innovative European payments. The new rules aim to better protect consumers when making online payments, promote the development and use of online and mobile payments, and ensure higher safety when it comes to cross-border European payment services. The development of this legislation was undoubtedly in response to the rapid growth of open banking.
Open banking is open data: the sharing of financial information through open APIs to allow access by third parties, following explicit authorization from the user. In certain legislation, such as the Open Banking Standard in the UK, this data sharing is also mandated to be in a secure, standardized form. The most obvious beneficiaries of this data sharing are financial service users.
PSD2 opens a treasure trove of readily accessible data to developers.
For the end consumer, it’s a complete reversal of the existing paradigm: open banking explicitly empowers account holders with the authority to share their own data, essentially removing the financial institution’s role as gatekeeper. Through third party applications and non-traditional financial service providers, consumers can manage their personal finances better through improved account oversight. They can also easily compare and switch banking services and can painlessly apply for credit products. Open banking offers a user-centric experience with unprecedented agency and access to information.
From a commercial standpoint, open banking has the potential to serve as a catalyst for new products and business models. PSD2 opens a treasure trove of readily accessible data to developers. For fintech companies, this allows them to tap into the existing financial ecosystem and compete with current banking products or provide new services. Spanning a broad range, from payment platforms like Adyen, and point-of-sale credit providers like Klarna, to budgeting apps like Moneyspend, new entrants to the financial market spur competition and innovation. Despite the new challengers, even traditional banks and financial providers have the opportunity to offer new services and improve interactions with clients.
European initiatives like PSD2 provide a template for other jurisdictions around the world to emulate, and the pursuit of blockchain innovation can be a great leveler in this regard. A performant, confidential, global blockchain would be able to provide similar “open data” through a public general ledger for all financial transactions. Sensitive financial information would be kept secure and private through cryptographic technology, while one common financial ledger guarantees standardization and interoperability, much like the UK Open Banking initiative.
Ultimately, our financial experience can become increasingly frictionless and user-centric.
Privacy would be ensured through state-of-the-art cryptography, and much like PSD2 mandated open banking, any transactions or sharing of sensitive financial information would require user permission and pre-authenticated under strong encryption. Unlike other forms of open banking, financial data never actually needs to be revealed: through Zero-knowledge proofs, users can make complex financial statements without revealing the underlying financial data.
These properties of the blockchain readily foster a robust open banking ecosystem. Confidentiality secures financial information behind cryptographic proofs; meanwhile interoperability substantially lowers the costs and complexity of digital financial services and payment platforms. Reducing the cost of entry allows upstarts to join the space and compete with traditional financial organizations. Newcomers could easily build digital wallets, smart investment funds with selective disclosure to minimize fraud, or even secure and auditable peer-to-peer lending services.
As Johnathan Hill, the former European Commissioner for Financial Stability, Financial Services and Capital Markets Union, said, open banking is “a step towards a digital single market.” In this unified market with free flow of data, consumers are the main beneficiaries as costs for financial services drop across the board and ingenious new products emerge. Ultimately, our financial experience can become increasingly frictionless and user-centric.