Open banking offers great promise to banks, corporates, fintechs and other financial institutions. Yet without a marketwide attempt to standardize the application programming interfaces — crucial to enabling such a system — these opportunities will be lost.
While APIs appear to be set to usher in a new era of payments solutions — especially after the advent of the Second Payment Services Directive (PSD2) — standardization of technical interfaces constitutes an imperative building block in enabling compliance with PSD2, and unlocking the full benefits of API technology. Now the question is what tangible steps can market actors take in the short term to unlock the opportunities of PSD2 and open banking?
From September 2019, PSD2 will see banks provide authorized payments providers with access to client bank accounts in Europe, most likely through APIs. This legislation can be seen as progress toward the open banking paradigm, which looks set to bring new business models and revenue streams to banks and financial services companies, alike. This, in turn, stands to benefit the customers of those financial institutions — by reason of a more improved and bespoke service.
However, many banks are yet to envisage how PSD2 can be transformed from a compliance burden to a business opportunity. Meeting PSD2 requirements could improve the quality of service offerings by streamlining and reducing the cost of payments, while granting access to exciting new services. For the financial institutions that provide these enhanced payments services, the eventual reward is achieving open banking architecture.
For corporates, banks and fintechs to unlock these opportunities, they must become actively involved in working groups on harmonization and implementation of standards, as well as explore potential collaborations — co-developing API standards or working to provide other essential services, such as API testing.
Market actors may also join a central directory, such as PRETA. Indeed, this will be essential for the success of any API standardization initiative. As for smaller market players, they would be advised to get involved in similar initiatives through their local banking associations.
Naturally, making PSD2 work in practice — and ensuring the interfaces are interoperable — rests upon an effective agreement of common standards, as well as a considerable level of harmonization between market actors. Providing access to accounts in a disorganized or incongruent manner could endanger PSD2’s opportunities for the entire market.
