Europe Fintech Open Finance Regtech

European Regulation Is Outdated With Respect to Modern APIs, Hindering Open Banking’s Roll Out

In January 2018, the Payment Services Directive 2 (PSD2) was introduced, paving the way for Open Banking: a new initiative, enabling third-party access to banking data. This created enormous space for innovation for fintech companies, promising ample opportunities to develop and deliver new, powerful financial products. However, there are still major pitfalls, for instance, regulatory hurdles, that are stifling the potential of open banking and posing new challenges for companies to tackle.

Open Banking and the use of Application Programming Interfaces (APIs) has led to the development of new financial products and services, reduced transaction costs. Furthermore, it plays a key role in optimising user experience in online purchases, and with online retail sales continuing to rise in an upwards trajectory, frictionless payments will be a key factor in ensuring competitiveness for merchants in the booming online retail industry.

However, instead of enabling financial service providers to streamline the launch of new solutions to support merchants, regulatory inconsistencies throughout the market are posing new challenges for companies, trying to innovate. According to Marius Galdikas, CEO at ConnectPay, they have experienced this first-hand in the midst of rolling out their Merchant API product.

“Each state interprets PSD2 regulatory policies differently, resulting in subtle nuances that need to be taken into account on a country-by-country basis, which leads to a plethora of differences and effectively limits smooth rollout,” Galdikas commented.

“Also, our Merchant API Is powered by Payment Initiation and Account Information services (PIS/AIS). In many cases, PIS and AIS cannot work without the other, however, they are regarded as two different licenses with separate regulatory nuances, adding to the challenges It is inconsistencies like such and the absence of a clear, unified approach towards what payer data hinders further progress and the presence of a truly open financial service ecosystem.”

Even though a recent report has found that the API availability in Europe has greatly improved in 2021, there is still much room for reducing friction for customers and improving the user experience. For instance, innovation has slowed down considerably due to the fact that European regulation is outdated with respect to modern APIs, many of which require extra steps for user authentication.

“While the intent is to improve security, and the extra friction is in line with user expectations on ease of use. As such, they deter users that instead opt for other apps and payment methods,” Galdikas explained.

Galdikas concluded by outlining what could help bring Open Banking closer to what it is supposed to be on paper.

“What could help enable Open Banking is a unified payment provider list in the European Union with real regulatory authority, as the present Register, set up by European Banking Authority is based only on the information provided by EEA Member States, meaning that unlike national registries under the PSD2, it has no legal significance,” Galdikas stated. “In addition, specifying the regulatory requirement scope would aid tremendously in addressing the problems at hand.”

Open banking plays an important role in facilitating cross-border payments. That said, if Europe wants to take advantage of that system, regulation would need to be consistent across all member states and updated for the available technology.


  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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