Exploring PSD2 & Open-Banking
Updated: Apr 29
Delving into the realm of open banking conjures an impression of the fruition of the payment service directive II (PSD2). Notwithstanding the potential for further development, PSD2 has transformed the banking landscape. By regulating new players in the financial sector, the industry appears far more dynamic than ever before. Large investments into financial technology and the rise of FinTechs has given bankers plenty to think about. Indeed, the relationship between banks and FinTechs has taken on a new dimension with examples of the latter vying for a slice of the market with the creation of neo-banks. Headlines from the FinTech world pay dividend to the inject of capital into those booming start-ups, but the ideas and coding that lies behind the facade is where the real interest will pay off.
PSD2, EU Directive 2015/2366 on Payment Services, was passed into law in
January 2016, but has only been applicable since January 2018. The directive
governs electronic payments and payment services within the internal market. It
provides a legislative framework for the relationships between consumers, third
party payment & service providers, banks, associated FinTechs and banking
competitors. The implementation date was the 14th of September 2019, however,
governments, industry associations and stakeholders are still discussing the finer
technicalities regarding the security surrounding open banking.
The directive places an obligation on banks to provide their customers’
financial data to authorised TPPs (Third Party Providers) when a customer wishes
to pay from their bank account via a payment initiation service provider (PISP) or
simply grant permission to access that data through an account information
service provider (AISP). This creates an unsettling future for traditional banks.
They stand to lose control over their customer base to new banks and banking
competitors offering better financial services at more competitive rates.
This access to transactional information disrupts the market, by
undercutting the competitive advantage of established banks and paving the way
for competitors to make the most of the accessible data.
The problem facing banks is the legal and technical obligation to be
compliant, followed by the competitive threat from the fringes of the financial
market. Competition is building and traditional banks have to adapt or perish to
the development of open banking.
Opportunities arise to those whom have understood and foresee the future
of open banking. The collection of financial data is stringently controlled and
likewise that control can prove decisive in building new applications to map the
financial landscape and consolidate financial products and services.
Security is paramount and the PSD2 framework demands strong customer
authentication (SCA). The fact that any accredited TPP can link up with any bank
in the European Union through an API creates a security risk. Maintaining an API
is a challenge for financial institutions with minimal technical expertise. From a
banker’s perspective, open banking equates to additional costs, exposure to the
competition and security risks.
The challenge for a bank is to maintain its advantage while being compliant.
The strategy revolves around the collection of financial data. There is very little
preventing a bank from becoming a TPP. Issuing a TPP licence to a bank is almost
a formality, since banking activities cover the vast majority of TPP functions in the
field of banking and finance. Operating as a TPP, banks can connect to their
competitors and gather transactional information from their customer base. Using
this data in conjunction with a diversification of their financial products and
services, banks can compete with the emerging threats to their business. They can take advantage of the opportunities by capitalising on some of their key
assets; confidence, reach and KYC.
Developing new software to aggregate financial data from multiple banks,
match credit scores with financial products & services and comparing bank
offerings are some of the possibilities under PSD2. The data includes current
account balances & transactional history amongst other details. Harnessing this
influx of valuable data will lead to consolidated overviews for individuals and
businesses of their finances, facilitating fast and simplified fiscal management.
Moreover, as open banking becomes more widespread, banks will have to adopt
alternative and improved engagement strategies to retain and attract customers.
In response to the introduction of PSD2, ALSEGO has developed
Opium.PSD2™. Our pragmatic and cost-efficient solution meets the demands of
the financial industry by intensively uses Robotic Process Automation (RPA) to
minimise third party support and web service publications. Moreover, the solution
utilises an authorisation directory to synchronise the sandbox and on-site
platforms. This approach is designed to limit the operational impact of the new
obligations on banks. The solution adheres to the Berlin-Group standards
regarding the communication protocol. ALSEGO has chosen this standard as it
seems to anticipate future directives that will result from PSD2, and because this
consortium has already demonstrated its expertise through the standardisation of
the Single Euro Payments Area (SEPA).
Opium.PSD2™ is divided into a three-parts. First, a component relating to
the subscription to the BPaaS platform dedicated to the Sandbox environment in
which the shared and automated services are installed and whose logical spaces
are secured and locked by TPPs in order to avoid any interference with the logical
space of another TPP and the bank’s production environment. Second, a
component relating to the installation of intramural software components on the
customer's site which constitutes the dedicated Livebox platform. Third,
assistance for integrating intramural software components with the customer's
The advent of open banking is generating an enormous amount of interest
in the future of banking & finance. In particular, the application of technology to
build a more dynamic financial industry. As a FinTech company, ALSEGO
rigorously rationalises solutions to solve technical problems. We bring innovation
to make your business more agile, more competitive and more performant.