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

Corebanking system.

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.