Open banking in Europe aims to enforce the regulations on legacy banks and open data access to authorised fintech. This data can be used to provide individualised services to consumers and businesses by offering products that meet their needs. For instance, to analyse transactional data and provide budgeting recommendations or effectively apply for loans. However, fintech can obtain this data only after a consumer has given their consent.
Depending on the type of licence/authorisation levels, fintech or Third Party Providers (TPPs) can not only help users with their finance management and loan application but initiate payments to make the purchasing process shorter and more efficient. When a TPP initiates a payment the user doesn't have to log in to their account, put in the transfer details and fulfil a long process of making a transaction. They only need to validate a transaction and the rest is done by the TPP. TPPs are highly regulated and audited regularly, therefore, there are no security threats to the account owners. Even more, before the transaction can happen a user still needs to use a type of authentication to ensure that there are no fraudulent activities. When a transaction is initiated straight from the merchant's website, it is done securely and merchants are forbidden to retain any payment details.
All the aforementioned actions happen via Application Programming Interfaces (APIs). APIs are a secure way to access bank account data without data infringements. However, open banking Europe has various methods of how to access this safe digital environment and the standards vary depending on the European Union member states. Each country sets their own regulations and standards on API use depending on the market forces, technical infrastructure, legal requirements and many other factors.
Due to the lack of API standardisation EU member states are not at the same level of implementation of open banking Europe. Different interpretations of open banking lead to slower or faster progress in the country. The key point for the slow success rate can be attributed to the novelty of the concept. The Revised Payment Services Directive (PSD2) enabled open APIs and free access for TPPs which only was enforced in September 2019. Until then, many legacy banks abstained from the open banking Europe implementation because they couldn't see the benefits in it.
However, PSD2 made it obligatory and legacy banks were forced to comply. EU member states that recognised the advantages earlier started the implementation process ahead of others and, therefore, can taste the fruits of success earlier than others. The United Kingdom (UK) was one of the first open banking adopters. It created the Open Banking Implementation Entity (OBIE) that launched detailed technical specifications and guidelines on the open banking compliance and implementation processes. Consequently, the rest of Europe was left behind and should be around 12 months away from the UK.
The downside of open banking is that not all banks comprehend the full value that it could bring. Hence, even after the PSD2, they withhold the processes sabotaging their own prospects in the modern digital world.
This situation appeared because the banking industry is very conservative and meticulous when it comes to innovations. From one viewpoint it is understandable as banks are a symbol of stability and authority, therefore nobody wants to have them diving deep into the unknown waters. That is why the open banking Europe PSD2 directory was needed - to give legacy banks the final push towards innovation and implementation of new technologies.
Mastercard took the open banking in Europe initiative into its own hands. It conducted research investigating open banking progress within Europe and concluded that Nordic countries together with the UK have accomplished the most. The report ‘Open Banking Readiness Index: The Future of Open Banking in Europe’ discovered that within those countries the use of open banking is already widespread and digital infrastructure has been technically advanced.
The report demonstrates the following numbers of technological infrastructure usage - “Households with internet access: 95% Denmark; 98% Norway; 96% Sweden; 96% UK; Percent of mobile phones which are smartphones: 88% Denmark; 95% Norway; 79% Sweden; 83% UK; Proportion of 14-76 year old using digital banking: 91% Denmark; 95% Norway; 84% Sweden; 88% UK”.
The UK however, is the world leader in the creation of an appropriate digital ecosystem with its own regulations and frameworks. According to OBIE the open banking landscape in the UK consists of 294 fintech and Payment Service Providers (PSPs). Almost half of them currently have live services and products to offer in the financial market.
Pan-Nordic went to create synergic schemes together with the Project 27 (P27) initiative. P27 is like an open banking Europe PSD2 directory but for pan-Nordic. Its purpose is to initiate a unified pan-Nordic payment infrastructure to aid its 27 million inhabitants. The region has its own open banking strategy with the biggest Nordic banks at the front - Nordea Group and DNB Bank.
Norway came forward and has created digital customer identification services like BankIDs or Invidem. They function quite the same as the Strong Customer Authentication (SCA) or Two Factor Authentication (2FA) in open banking in Europe. Their purpose is to verify the identification of a person or a business to ensure secure access and use of their funds.
Since Mastercard recognised the lack of standardisation within open banking in Europe and the use of APIs it took initiative and made steps towards the unification of API usage. As Jim Wadsworth, Senior Vice President for Open Banking, Mastercard, said: “There are varying approaches across the continent and to ensure that all European markets can take advantage of the opportunities that open banking presents, we need greater standardisation. Mastercard Open Banking Connect provides a universal connection to financial institutions’ open banking functionality, providing third parties with scale, resilience and speed.”
It is clear that Europe is slowly moving forward towards easy and unified use of open banking, however, it may still take time for all involved parties to recognise the benefits and utilise them to increase the revenue.
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