PSD2: Sorting fact from fiction

By Rosie Ward | 1 March 2018

For those in the industry PSD2 has become a familiar acronym. In simple terms, the EU directive puts ownership of financial data back in the hands of the consumer.

For consumers, who are only now waking up to the implications of this new directive, there’s significant confusion around the new rules and what they mean for the way they manage their finances.  

This is hardly surprising. PSD2 and Open Banking have been hitting the headlines in the wider media but much of the coverage of the regulation has focused on its potential pitfalls - from the Daily Mail (“Is the open banking revolution a fraudster’s charter?”) to The Guardian (“Open banking? I think I’ll be keeping my door shut”). This has resulted in a range of myths and misconceptions about open banking.

Here, Daniel Kjellén, CEO and co-founder of Swedish fintech, PFM app and aggregator, Tink, unpicks some of the more outlandish claims from the media about open banking and sets the record straight.

“Open banking will put your money at the mercy of hackers and thieves”

No, it won’t. Far from creating a data free-for-all where unscrupulous third parties can get their hands on customer information, PSD2 gives consumers more control of their data than ever before. Under the regulation, if a customer wants their bank to share their data with a specified third party, that is their choice, and they can withdraw that consent at any time. Headlines declaring that ‘banks will be forced to share your data with companies that demand it’, are at best misleading, and at worse, scare-mongering.

PSD2 mandates that customer data is accessed through open Application Programming Interfaces (APIs). In simple terms, this is a method of allowing individual data, such as account information, to be shared. The open APIs used for PSD2 will be built according to standardised definitions, meaning that data will only be shared in accordance with the same rigorous quality and regulatory standards already adhered to by major banks across the world.

Any third party wishing to participate in open banking in the UK requires FCA authorisation to do so, and will be subject to the same regulatory standards as the banks themselves. Meaning that the open banking system will be at least as safe as the current one. Earning a customer’s trust by delivering a secure service is in everyone’s interest. Any provider, be the bank or fintech, that fails to meet the rigorous security and regulatory standards, will face not only the wrath of the regulator, but also of their customers.

“Open banking will be the death knell for traditional banks”

Not for traditional banks, but it is true for the traditional way of operating on the retail banking sector. Clinging doggedly to a traditional operating model and refusing to innovate will be suicide for the banks.

But for the forward thinking banks, this is an opportunity to future-proof their business. The first banks to embrace the opportunity to innovate to stay competitive will be the winners.

The retail banking sector is being given a much needed shake-up. For years, banks have operated in a stagnant market, free from the challenges of competition and transparency. By breaking open the market and making it easier for customers to switch accounts, traditional banks will for the first time be forced to fight for their customers.

The traditional landscape was no better for the banks than it was for their customers - long held back by legacy systems, banks have not had the incentive to invest in technology that would offer their customers superior products and customer experience.

The advent of open banking has seen these banks entering into partnerships with fintechs, giving them access to technology and the consumer insights needed to develop their own products. This is allowing them to upgrade their consumer offering, increase loyalty among their current customer base, and win new customers from their less nimble competitors.

“PSD2 will revolutionise how you manage your money”

100% percent true. But the change won’t be instantaneous. Like any ecosystem, open banking will take time to develop.  But rest assured that the end result will be a game changer. It isn’t an overstatement to say that consumers’ access to financial services products will be transformed.  

Open Banking will tear down the barriers to switching banks and comparing products. In the not too distant future, customers will not only be able to see their entire financial life in one place, they will also be offered alternative products and services better suited for them. Insights and advice will become actionable from a single screen and switching products will become as easy as pushing a button.

The spark that will kick this into action is ‘aggregation’.

There’s a big buzz around aggregation at the moment, and for good reason. It’s the disruptive force in the driving seat of the open banking juggernaut. Aggregation is what enables personal finance management (PFM) apps to gather and analyse your data, which is where things get exciting.

PFM apps use aggregation to provide a holistic view of the user’s finances. These insights into the consumer’s personal finances - including their spending habits and behaviours - enable the app to build a full picture of that user’s financial personality over time, which is used to nudge the user towards products that are better rates, and products that are suited to their financial needs. Managing money will become effortless and rewarding for everyone.

By embracing aggregation, banks are embracing the opportunity to innovate. This is what will enable them to remain competitive against the new market entrants.  Open banking is coming, it’s unstoppable, and it’s here to stay.

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