Over the past 5 years, we’ve seen an acceleration in Open Banking initiatives, driven mainly by the 2nd Payment Services Directive (PSD2). From a regulatory “burden” to now providing additional and complementary “banking-like” solutions, Open Banking companies notice a growing interest in their solutions and products, in a digital environment that is putting users and their needs at the center. Now, they are also advocating the move to Open Finance…
Regulatory changes: from the review of PSD2 to the Open Finance Framework
Open Banking, at least in Europe, is mainly driven by regulation. Therefore, one can only welcome the 2023 wa ve that has already been initiated.
First things first, we would like to underline a significant change in the PSD2 RTS (Regulatory Technical Standards) that is to smoothen the journey of users: the switch from the 90-day Strong Customer Authentication (SCA) to 180 days, that will reduce a frustrating point and therefore boost usage of account information services (AIS). This evolution was advocated by the EBA (European Banking Authority) several months ago: it will come into force by July 25, 2023.
Instant Payments (IP) are to become the new normal in Europe, as expressed several times over the last months by Commissioner McGuinness. IPs will be free and accessible to everyone in Europe, serving the underbanked and improving financial inclusion, but it is also about providing most efficient payment services. Combined with A2A Payments, it represents a huge improvement as more people will be able to pay in various daily life situations online – without the need from additional accounts or cards – and funds will be sent/received directly therefore drastically improving their personal finances visibility. The EC’s legislative proposal also aims at increasing trust in IPs, with an obligation on providers to verify the match between the bank account number (IBAN) and the name of the beneficiary provided by the payer in order to alert the payer of a possible mistake or fraud before the payment is made.
We at LUXHUB, are also anticipating the review of PSD2, due in the months to come, and which will focus on new payment services and on additional requirements in terms of customer protection and transparency. The EBA shared a few months ago a list of elements to be considered in this context, including the possibility of having a common API standard across the EU to be developed by the industry, requiring all ASPSPs to provide a dedicated interface for TPPs’ access, clarification of the scope of information to be shared with TPPs, as well as a clarification of the type of information to be shared from TPPs to ASPSPs. It should also highlight the need to move from Open Banking to Open Finance, with the expansion from access to payment accounts data towards access to other types of financial data.
In this respect, and logically, the European Commission is currently working on the long-awaited Open Finance Framework, which aims at enabling data sharing and third-party access for a wide range of financial sectors and products, in line with data protection and consumer protection rules.
Key Open Finance use-cases
Open Finance can be defined as the extension and natural evolution of Open Banking, going beyond the payment scope, and it therefore has the potential to disrupt most financial services, from investment and wealth management to mortgages and insurances. Here are of the most promising applications/use-cases/trends of Open Banking, soon to become Finance:
- REQUEST TO PAY: This convenient way of communication offers many benefits to all stakeholders involved in a transaction, from merchants (payees) to consumers (payers). These revolve mainly around the ease of implementation for the former and of use for the latter. It also means lower fees than credit cards or e-wallets, fewer payment rejections and therefore fewer reconciliation efforts. Also, RTP gives more flexibility to the consumer, reaching its full potential in some of the following situations: pay-per-use, telesales, etc.
- MORTGAGE: Utilizing the European financial data space to improve the mortgage credit market for consumers by ensuring choices that better fit consumer’s needs and personal circumstances. The growing number and diversity of personal data collected – in accordance with GDPR and subject to PSD2 consumer consent – can have a positive aspect on the mortgage credit market through improvement in products, advice and creditworthiness decisions and improved transparency due to a more effective and less costly data access process.
- VEHICLE INSURANCE: Nowadays, cars generate a whole lot of data which can be used by insurers to offer a range of new products and services, as well as finetuning existing pricing, products and services. Such data is currently collected by vehicle manufacturers, but with the consent of drivers, insurers could offer pay-as-you-drive services, for instance. Nowadays, more and more tailor-made products are already being offered based on driving styles, as well as awarding more favorable tariffs to lower-risk drivers. More generally, in-vehicle data can also help improve road safety and eco-friendly mobility, as well as enable the successful development of connected and even autonomous cars.
- CUSTODY SERVICES: The opening of securities accounts through the use of APIs, notably, would enable the exchange of position and transaction data, including valuations for reconciliation purposes, on a near real-time basis. Moreover, a standardization of custodian data formats will mean less friction as well as reduced operational costs.
Yet, there’s still some education to do and spread these concepts to all stakeholders:
- First and foremost, it concerns citizens and individuals who are using their banking apps on a daily basis. How can they consolidate their financial data and have a better and real-time view of their finances? What about initiating payments from one single app? Moreover, they will be able to save time by reducing some paper-based tasks that are eliminated through digital services (one can notably think on signing a mandate/reconciliation)
- Banks and financial institutions, on how to move from “mandatory” to “value”, or from complying to PSD2 to now taking advantages of additional opportunities, and build new services, partner with innovative players, provide clients with new solutions. In other words, how can they create new revenue streams by offering complementary functionalities and services?
- Merchants and retailers will also realize that they can easily move away from traditional payment and card-based methods, by leveraging cheaper, efficient and instant solutions, while providing payers with secure and flexible means of payments and experiences.
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