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Token: Uncovering PSD2’s Dirty Little Secret That’s Holding Back Open Banking Payments

Open banking is enabling payments to occur using as account-to-account (A2A) transactions are on the rise. However, the successful adoption has not taken place globally, and this is in large part due to inadequate APIs being used. 

Nikita Septucha, Head of Technical Sales and Implementations at Token has over a decades worth of experience in the payments industry. Here, Septucha discusses how he believes industry and regulatory pressure is now required to get Europeans to be able to successfully use Open Banking-enabled A2A, alongside the use of partnerships with fintechs: 

Nikita Septucha, Head of Technical Sales and Implementations at Token
Nikita Septucha, Head of Technical Sales and Implementations at Token

Open Banking-enabled account-to-account (A2A) payments are on the up. But whilst the momentum behind their march to the mainstream is unstoppable, they’re not ubiquitous yet.

This is because PSD2 is hiding a dirty little secret: APIs in Europe still have a long way to go to fully support Open Banking and a comprehensive roll-out of A2A payments. But the UK got it right, and Europe can too. So rather than just pull back the covers on this issue, I’m keen to highlight exactly what’s wrong and how we can remedy it.

Stitching together Europe’s fragmented API landscape 

The UK is a leader in the Open Banking space. Its regulatory-driven approach saw the country’s nine largest banks tasked with funding a centralised programme and platform – the Open Banking Implementation Entity (OBIE). It’s been a success. In its latest annual report, the OBIE noted more than three million Open Banking users, with over 700 companies involved.

A government-led programme has many benefits, as a recent Gartner report states: “A positive effect of government-mandated Open Banking is that it can include the definition of API standards.” The European Union’s (EU’s) approach is also regulatory-driven, drawing on PSD2. But whilst PSD2 dictates the banks must create APIs that interact with third parties, there’s no specific guidance about how to do it. Instead, PSD2 leaves the details of APIs open, with only the technical framework conditions specified.

This has led to a fragmented ecosystem, with Open Banking working well in some EU countries, like Belgium, but running into significant challenges in others. Some markets have evolved industry standards whilst others haven’t. And, crucially, there’s no single pan-European Open Banking API standard. Industry initiatives have resulted in domestic, harmonised API standards for accessing bank accounts at a country level, such as STET, PolishAPI and the Berlin Group’s NextGenPSD2, but variation remains, making these more frameworks than standards.

Part of the solution here is partnerships. Given the complexities and fragmentation of Open Banking APIs across Europe, having the right partner in place is critical to reaping the benefits of A2A payments. So we, like other fintechs, are working directly with industry associations and banks across Europe to build the Open Banking infrastructure that will deliver real value to everyone in the ecosystem. As a result, merchants are beginning to benefit from lower costs and increasing conversions, while consumers can enjoy zero data input and unrivalled ease.

The fragmented nature of Open Banking APIs in Europe also throws up some issues with the predictability of payments. Some of the statuses we get back from banks still don’t give us a high degree of confidence that the payment will be successful, and we can only rely on a full reconciliation to confirm this. If the bank isn’t using an instant rail, notably SEPA Instant, this can take several days. And not all banks across Europe support SEPA Instant. Support is even inconsistent within banking groups. For example, we’ve had instances where two or three regional branches of a Tier 1 bank in France don’t support it.

I think it’s crucial for European banks to adopt SEPA Instant consistently or otherwise implement a form of payments guarantee, such as an authorisation API specified by SWIFT. It’s the regulators that must drive banks towards this consistent adoption, with lobbying from industry associations if it’s required.

Stabilising Europe’s growing API economy

There are also problems with API stability across Europe. Whilst things are moving in the right direction, with better response rates emerging, I’d say that Europe is still around six to 12 months behind the UK.

To illustrate this point, we recently encountered a Tier 1 banking group in Germany that had an issue that meant consumers couldn’t log in to authentication pages. This issue lasted ten days. Meanwhile, a financial institution in France notified us it was temporarily switching off payment initiation services to complete an emergency change. This outage lasted five days. Of course, if a national bank’s online banking or mobile app goes down for five or ten days, it would make national news — but, somehow, this isn’t the case when the same consumers of the same banks can’t make payments using Open Banking.

In nearly every European country, banks continue to identify API fixes required on their end. Whilst these are typically corner cases rather than fundamental issues, it tells us that connections are not 100% proven yet.

Instability is a normal part of the cycle of maturity. However, European regulators must encourage and enforce banks to accelerate their trajectory towards improving reliability and stability. Only once banks in Europe achieve predictable, consistent API stability and reliability can we, as an industry, really shift away from traditional payment methods and towards A2A payments.

Enhancing user experience 

The final point I’d make is that a brilliant user experience for consumers is one of the most exciting promises of Open Banking. Still, banks across Europe have unfortunately not yet made this a priority.

In the Open Banking ecosystem, it’s banks that control the authentication, which ensures that authorising access by a consumer is as intuitive as logging in to their mobile banking. However, the flip side is that many banks haven’t designed authentication to provide a good user experience. Many still require a mobile PIN or another one-time password.

Again, I think the regulators need to step in to provide guidelines on user experience and mandate either decoupled or app-to-app redirect methods of authentication. Similar guidelines and mandates in the UK created an experience that’s easier and more intuitive than cards – so much so that A2A payments in the UK rose from 320,000 in 2018 to more than 3.4 million last year. In 2021, this has jumped again, rising to 1.2 million in January alone.

Open Banking can be complicated, as with any developing market. But when it comes together, as it has in the UK, it offers a great user experience for all stakeholders – and a next-generation payment method. I think the user experience amongst UK banks is now pretty consistent, and in some cases, amazing. We have the OBIE’s hard work to thank for this.

Europe can catch up by leaning on lessons learnt by the UK. But, while strategic partnerships can negotiate some of the hurdles put up by Europe’s fragmented Open Banking ecosystem, industry and regulatory pressure is now required to get us all over the line together.

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