Europe is leading a new wave of fintech innovation that will dramatically change the face of banking and the payments ecosystem. The European Banking Authority's PSD2 (the updated Directive on Payment Services) is leading the way to what is being widely recognized as Open Banking. The European Banking Authority is putting in place policies and standards that allow fintech organizations (Third Party Providers or TPPs), recognized and authorized by banks, to access customer data via open standard API (application programming interface) to create and deliver a new breed of financial services. This is happening under the PSD2 umbrella.
The move is historic. For centuries bankers have closely held details of their account holders, making it the basis of their trade. And this is set to change. The deadline for banks in the EU to implement PSD2 is January 2018. That is the date by which one can expect the birth of a new payment eco system. While it is too early to predict how this will impact the future of Merchant Acquirers and Issuing Banks, one thing is certain: they will need to transform their business in order to remain competitive.
Just one example of how PSD2 will impact current payment systems makes it clear that a revolution is on the way: with PSD2, you as a customer of, say, an online grocery store can authorize the store to access your bank account directly and complete the payment. Puff! The entire credit card issuer-merchant acquirer payment loop becomes history.
What happens is this: PSD2 designates your grocer (or airline, insurance company, food delivery or taxi hailing service, etc.) as a Payment Initiation Service Provider (PISP). Your bank becomes an Account Servicing Payment Service Provider (ASPSP). The PISP accesses your account (called XS2A) through a secure, interoperable API provided by the TPP.
Introducing a new actor like the TPP changes everything. To begin with, it lowers transaction costs that can be passed back to the consumer. Secondly, with access to your account data, the TPP can deliver entirely new customized services to you (and perhaps even know exactly when to offer you credit!). Thirdly, with the introduction of APIs, the push towards digital processes will gain momentum, eliminating expensive, error-prone and time consuming paper work that has been the bugbear of the banking / payments industry. Just imagine the transformation in correspondent services alone as Customers, Merchants, TPPs and Banks interact through applications interconnected via public, open APIs.
It is worth recognizing that open banking with also ensure that the industry becomes more agile with secure, standards-based API that support the faster development of services, increased innovation, better regulatory compliance and lower maintenance costs.