Everything You Need to Know About PSD2 and Open Banking

The financial industry has grown incredibly large over the past several decades. From conventional bank wire and cash payments, our financial systems have quickly evolved into online-driven, e-wallet-type platforms where almost every major or minor transaction is just several clicks away.

And if one particular aspect is to be mentioned explicitly, it’s definitely the contribution of the private sector. The invention and proliferation of the internet, development of ridiculously powerful digital machinery, and other crucial achievements in the late-20th and early-21st centuries have largely originated from private entities, be it corporations or individual inventors.

But this doesn’t mean that the public sector - that is, the government - was totally ineffective in this sense. Such a claim would be an understatement of the role the public sector has played, and is playing, in the development of finances. And granted, the intervention in this industry has also proved very detrimental at times, but we still shouldn’t downplay the role of governments.

The two of the most recent financial initiatives announced by the EU and UK governments are particularly important in this matter. The first one is called the European Union’s Second Payment Services Directive (PSD2), while the second one has a much shorter name - the Open Banking initiative.

Both of these initiatives have been announced at the beginning of 2018 and were directed towards improving the transaction speeds and security challenges in finances. Many public officials, as well as financial analysts, believe that the PSD2 and Open Banking initiatives are the next step towards a more customer-oriented banking and financial services. 

Basically, these initiatives are supposed to make financial connections between customers and financial companies - whether they are major commercial banks, financial data aggregators, or other third-party market players - much easier, more secure, and faster, not to mention more profitable. PSD2, for instance, takes upon itself to include non-banking entities into the payment industry, making a fairer playground for different players and customers alike. 

Similarly, the UK’s Open Banking initiative is focused on making financial services much more convenient for customers, as well as market players. Basically, this initiative uses an open Application Program Interface (API) which then allows smaller third-party players to base their products/services on the already-existing platforms. On top of that, Open Banking also offers much higher transparency for both private and open data.

After we’ve briefly covered the two initiatives, let’s say what the differences are between the two and what their specifics look like. First, let’s talk about the coverage range.

The UK’s Open Banking initiative is much more liberal to the regulatory subjects, demanding to be implemented by just nine large providers in the UK - so-called “The Competition & Markets Authority Nine.” But since this initiative is a gateway towards the more innovative approach in finances, many forward-thinking banks were also eager to incorporate the same concept into their services.

However, the EU’s PSD2 is much more demanding in that sense. The initiative requires all the financial players in the union to apply the same standards, notwithstanding their scope of operations nor anything else. 

The next important difference between the two initiatives is the compliance period the banks and other third-party players have to incorporate these directives. Since the EU is a much more complex and significantly slower when it comes to adopting new rules, the EU-based financial players had an 18-month period to comply with the PSD2 directive. 

On the other hand, the UK financial firms had already incorporated the Open Banking solutions by the directive deadline. Granted, there were some exceptions that were allowed to have a certain time concession for incorporating the Open Banking solution, the overall success was much more apparent in the UK compared to the EU.

Finally, let’s discuss the common vs “laissez-faire” standards. On the one hand, there is Open Banking which uses a single API established and implemented by the aforementioned nine banks. This makes for a very convenient platform for third-party financial providers to base their products/services on the already-existing bank accounts - with their customers’ permission, of course.

The EU model is exactly the opposite of that of the UK. PSD2 is based on open APIs which are defined by the market. This means that there is no unified Application Program Interface that can be used universally - by all market players.

Instead of that, the individual financial entities will have to create their own APIs. And most of the time, those APIs will be limited to the specific customer bases and service coverages, which, as many analysts believe, will be less effective for the overall progress than the unified model.

In conclusion, the PSD2 and Open Banking directives initiated by the EU and UK governments are aimed at making financial, as well as data exchanges between customers and banks/third-party firms much easier and more convenient.

Both of the directives are similar in their goal, however, there are quite extensive differences between them, be it in coverage range, implementation period, or the API platform layout. Ultimately, their effectiveness will be tested in the near future.