Is the PSD2 glass half empty or half full?

Eppo Heemstra
Connective Payments, May 2021

PSD2 and Open banking: depends how you look at it

In our latest article on PSD2 and open banking, we highlighted the slow pace of innovations following the introduction of PSD2 in the European payments ecosystem. Since then, there have been a number of interesting developments. Some of them endorsing the view that promises remain mostly unfulfilled, others accentuating the opportunities for both incumbents and FinTech startups. Of course, as always, it depends on how you see your glass. Half empty, the relatively slow uptake is disappointing. Half full, the future for PSD2 and Open APIs in general is -still- bright. Here’s what we think.

Half empty?

In our previous article on PSD2, we pointed out the difference between the European continent and the UK. In the UK, the Open Banking Implementation Entity (OBIE) ensured the setting of detailed technical standards. This led to lower barriers to entry and therefore a higher number of open banking offers than elsewhere. However, still only 3 million UK customers and businesses are using open banking-enabled products at the start of 2021, according to the OBIE’s annual report. Furthermore, account switching still remains low. Commenting on the state of open banking in the UK, Mr Oliver Prill’s glass is half empty. Mr Prill, the CEO of Tide, said that the slow uptake of open banking and PSD2 has meant missed opportunities for both customers and companies. “We, like many others, are disappointed by the slow uptake of open banking”, he said. “There have been attempts to increase uptake, but exhortations can only achieve so much. Now that open banking is established, at least at a basic level, we believe its true potential is only likely to be realised if the high street banks are positively incentivised to participate. Open banking can significantly improve the range and quality of products and services offered to small businesses.”

Global survey

Further proof of the “half empty” view of PSD2 comes from a global survey by Mambu (1). Of 2000 people surveyed, 52% have never heard of open banking, 61% have never used it and of those who have, 53% still worry about sharing their data.

Half full?

On the other hand, the same annual report by the OBIE mentions the use of open banking-enabled products doubled in the six-month period from January 2020. Open banking technology powered 6 billion calls through FinTech APIs and more than 4 million consumer transactions. A recent study by PwC suggests that more than 70 percent of U.K. SMEs will adopt open banking by 2022. (2)

Elliott Limb, chief customer officer, Mambu, recognonises that the global survey reveals that the majority of respondents doesn’t understand what open banking is, how it works and what it means for them. Nevertheless, “the research also reveals they do care about receiving better financial services that support their lifestyles – smart banking. If banks address this need and lack of understanding, it will help banks build customer loyalty and provide genuinely innovative, differentiating, revenue-generating services.” The survey showed that nearly half of respondents want instant digital money transfers. Furthermore, more than a third want aggregated bank balances at a glance. A third want tips on better money management;  a quarter want money-saving suggestions for their bills. (3)

Consumer willingness in Germany

Recent research by Solarisbank and the Handelsblatt Research Institute found considerable conversion potential for e-commerce providers to offer financial services in Germany. They conducted a  ‘representative survey’ to determine the willingness to obtain financial services from 21 German e-commerce providers spanning retail segments of fashion, electronics and media, hobby and DIY furniture and household, groceries and toiletries. The survey found that 61% of Germans can imagine using an integrated financial service (embedded finance) from at least one of the e-commerce providers listed. (4)

An interesting further development in that respect is the extension of open banking API rules to a wider range of products, under a new model billed as ‘Open Finance’. Open Finance could be beneficial to a wider range of services in the general insurance, cash savings, lending and mortgage markets.

Banking-as-a-Service

In this regard we have pointed at the different positions of incumbent banks and TPPs, and the fact that working together could be a winning strategy for both. Whereas traditional attitudes dictate that newcomers are by definition a threat to vested interests, new views on Banking-as-a-Service (BaaS) gain momentum. Incumbent banks can generate new revenue streams by allowing TPPs to utilise their underlying infrastructure, data, and banking licenses. In that way, TPPs can build new products on top of the traditional banking infrastructure via APIs. A good example is a new service dubbed Instanea, by BNP Paribas. The company announced in March that it is going to provide instant account-to-account payments for EU merchants through its partnership with open banking provider Token. Using just a single interface, Token Pay provides unified access to up to 3000 banks in Europe for the initiation of real-time account-to-account payments, straight from apps and websites. Carlo Bovero, global head of cards and innovative payments at BNP Paribas, whose glass is clearly half full, says: “The advent of open banking APIs presents a unique opportunity to innovate and deliver instant payments at scale.” (5)

Faster credit for entrepeneurs through PSD2 related services

Business intelligence service Graydon recently started a pilot in collaboration with Yolt Technology Services (YTS), to help entrepreneurs get a better credit position based on PSD2. When they share their bank details as part of a financing application, they get faster access to tailor-made credit options in an easily accessible way. For example, when they apply for a loan, a lease car, order on credit or any other form of financing. Based on monthly incoming and outgoing total amounts, a thorough and reliable insight into the cash flow and thus the liquidity of an entrepreneur is created. 

Together, Graydon and YTS developed the Cashflow Analyzer. As PSD2 license holder, YTS is the processor of the payment data and responsible for the underlying technology and data analysis. Graydon does not have access to the payment data of entrepreneurs. Through the cooperation with YTS, Graydon is able to offer its customers richer insights based on new innovative data sources (6).

PSD2 Payment Initiation Service

A very convincing case for in-app PIS (Payment Initiation Service, as part of PSD2) was made in a blog by Peter Stonham. He described his experience transferring money from the UK to a relative in Canada, using Wise. His customer journey was much like iDeal, allowing him to set the details of a transfer from within the Wise app. This way, the only time he left the process flow was to authorise the payment at his trusted bank. Once authorised, he returned to Wise. Definitely not the time consuming and costly process, switching in and out of different apps, he had grown accustomed to when making a cross border payment. (7)

Half empty or half full?

Again, it depends how you look at it. If you are working on new business opportunities from PSD2, like Mr Oliver Prill, it may look as if things move much too slow. And you are right. Even in the UK, which seems ahead of the European mainland, most consumers are still unaware or reluctant of open banking possibilities. However, as new applications of in-app services made possible by Open APIs keep emerging, the best customer experiences will prevail and overcome the initial anxieties. As we pointed out earlier, the case for PSD2 is still very strong. Consumers have much to gain from the rapid proliferation of open banking and Embedded Finance services. 

Driving force

There is reason to believe that platforms like Amazon will become the true driving force behind the PSD2 and open banking adoption. First, they are seeking to avoid interchange fees charged by the international card schemes, which are expected to further increase in the EU. Second, the open banking infrastructure provides an easy and secure way to verify a customer’s identity. Much less cumbersome than with strong customer authentication (SCA) and 3D Secure, which are mandatory for card payments. Higher transaction costs and poor user experiences will negatively impact conversion rates of card payments. This will lead merchants to explore alternatives such as Payment Initiation Services through open banking.

Therefore both banks and TPPs are more likely to get involved in the open banking game sooner rather than later, and follow the examples of BNP Paribas, Token, YTS and other successful players.

Half full then, it is.

Let Connective Payments guide you

When you are considering applying for a PSD2 license in the Netherlands to grow in Europe, Connective Payments is your preferred partner. We have ample experience in applying for PSD2 licences with the Dutch central bank (DNB). Each application and each business is different and needs a tailor made approach. We know which steps to take and which documents are the most challenging. Download our whitepaper and learn how PSD2 licensing in the Netherlands works.

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Eppo Heemstra

Eppo Heemstra

Partner Connective Payments
PSD2 lead & Compliance
+31 620 352 007
eppo.heemstra@connectivepayments.com

Notes

  1. Mambu “Disruption Diaries” research report: https://www.mambu.com/insights/press/mambu-research-reveals-global-consumers-are-hesitant-to-use-open-banking
  2. PwC – The future of banking is open. https://www.pwc.co.uk/financial-services/assets/open-banking-report-web-interactive.pdf
  3. https://www.finextra.com/newsarticle/37857/consumers-still-wary-of-open-banking
  4. https://www.finextra.com/newsarticle/37929/massive-potential-for-embedded-finance-in-europe—solarisbank
  5. https://www.finextra.com/newsarticle/37634/bnp-paribas-rolls-out-a2a-instant-payments-for-e-commerce-merchants
  6. https://hollandfintech.com/2021/05/psd2-improves-credit-position-of-smes
  7. https://www.fintechfutures.com/2021/03/taking-charge-and-reducing-charges/

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