While the UK was the first to embrace Open Banking, the rest of the world has been close behind. With 52 countries having now rolled out Open Banking regulations, it remains at the forefront for European regulators as they determine what their next move will be.
Andria Evripidou is Public Policy and Compliance Lead at Yapily, a fintech that offers open banking APIs that connect businesses to banks. Here she discusses Europe’s next move in open banking regulation, and how we’re on the road to open finance.
Three years since its introduction and the future of Open Banking is the topic of conversation for European regulators. And globally, regulators are trying to replicate the EU’s PSD2 and follow in the footsteps of the UK in paving the way for Open Finance.
The impact of this has been a seismic shift in the industry’s focus to deliver more consumer-centric financial services as opposed to bank-centric “off the shelf” products. Promoting innovation while giving consumers more visibility and rights over their own data. And creating a level playing field for all payment companies.
Undoubtedly, Open Banking is the first step on the road to Open Finance. The question remains as to what Europe’s regulators’ next move is in this marathon race.
Open Banking: a European affair
Open Banking in the UK has been a real success story. Over 3 million users are now actively engaged with Open Banking solutions – a figure that has doubled in 2020 alone. But Open Banking adoption across Europe has had mixed results for a myriad of reasons.
In some countries, like the Netherlands, existing financial infrastructure – like iDeal, an open source payment system in play since 2005 – and a lack of consumer trust in cards, saw significant early adoption in Open Banking. But the level of enforcement by the National Competent Authorities (NCAs) of PSD2 requirements was patchy at best. And resulted in a disparate implementation of the directives across much of the continent.
The overall development level of a country’s financial ecosystem has also played a big part in the success of Open Banking adoption. Eastern European countries that had more outdated financial infrastructure were more receptive to innovation than countries whose financial systems were working well and met consumer needs.
Europe’s regulatory dilemma: supervise & enforce or wait & see
The European Banking Association (EBA) has recently published its next steps. Outlining the actions NCAs should take to ensure banks remove any remaining obstacles that prevent third-party providers (TPPs) from accessing payment accounts or restrict EU consumers’ choice of payment services. This is positive, but we need to see adequate supervision by NCAs when it comes to enforcing new regulations. As without this, implementation is likely to be patchy and may hinder the uptake of Open Banking and subsequently Open Finance.
That said, the EBA’s move has been overwhelmingly positively received. And if adopted, this move will make Open Banking integration with European member states significantly easier and lead to even further mainstream adoption.
Looking forward, the key to unlocking more of Open Banking’s potential across Europe lies in promoting Open Banking payments at physical checkouts. Despite the rise in eCommerce over the last year, the majority of purchases still take place in shops using cards, not Open Banking. But there is nothing from a regulatory perspective that stops the switch away from cards to Open Banking payments from happening at point of sale.
The technology is available. An update to the store terminals so they can accept QR codes would allow Open Banking payments at the tills. The benefits would be threefold. Merchants pay lower fees than existing card fees, saving money. Consumer trust increases as Open Banking services become more mainstream. And FinTechs gain access to a much broader audience than just those that shop online. Ultimately, everyone wins. So the question remains, should the regulator intervene to promote this change or wait and see for the industry to embrace it?
Looking beyond to Open Finance – and the tale of two OBIEs?
The ultimate destination is Open Finance. Which has the potential to completely change the way we look at our financial lives and bring about true financial inclusion for all.
In a world of Open Finance, financial management applications will have a holistic view of an individual or business’ financial circumstances in real-time. TPPs will use aggregated data to offer advice and services, and execute transactions on behalf of customers – giving their customers greater control over their finances. Creating financial inclusion for all.
In practice, this could be a personal finance dashboard that enables consumers to understand and optimise their cash flow, savings or investments. Unlocking other sectors beyond banking – pension providers, insurance and utility providers – to engage in Open Finance.
To make Open Finance a success, we must bring the industry and regulators together to form an entity that will oversee the implementation as well as create a successful framework that will set the benchmark globally. In the UK, we had the Open Banking Implementation Entity (OBIE), whose goal was to create a level playing field for ecosystem participants. To a great extent, this has been achieved.
As the ecosystem matures, the Competition and Markets Authority is now considering the future of the OBIE. Both the future entity and existing Open Banking participants have many lessons to learn from the success of the current OBIE. Harmonisation, user experience and surveillance must remain at the forefront of their agenda.
There is still some way to go before we reach the harmony required for Open Finance. But there’s no doubt that European regulators’ next move will be a step in the right direction.