On 13 January, new legislation will pave the way for a great increase of choice in the way individuals and SMEs can manage their finances.
The Payments Services Directive 2 (PSD2) and Open Banking, will come into effect, heralding a major shift in the way banking operates, from a system of stand-alone banks, providing a specific range of products to an eco-system where many players collaborate to offer a much wider range of services.
PSD 2 states that banks must allow customers to decide which other companies, known as ‘third party providers’, can have access to the data held in their current accounts, according to the services they want to use. So it will be account users who will own and manage their own payment information, rather than the bank. There will be two types of service: payment initiation and account information.
In the UK, ‘Open Banking’ will provide the rules and the platform to make sure that the banks and the third parties (i.e. other banks, technology companies, or fintechs) can communicate easily and securely with each other. The communication under Open Banking will be done via APIs and will be highly secure. In addition, under the new legislation, TPPs will all have to be authorised by the Financial Conduct Authority, which will ensure they are legitimate, well-run companies.
What will this allow customers to do?
PSD2 will give customers the option to share their current account data and access services from other providers which suit them better.
Just some of types of service on offer will be:
- Easier access to credit for individuals and SMEs.
- Access to cheaper overdraft services.
- Budgeting apps, which track spending and suggest ways to save.
- Automatic savings systems which move unused balances to interest-bearing accounts or regular savings products.
- Comparison services for loans, mortgages, and insurance targeted to individual circumstances.
- Dashboard type aggregation services allowing customers to see all their different bank accounts in one place.
- Ways to make payments directly from your bank account and not through a credit card.
What is Open Banking?
Open Banking is a platform and a set of standards put in place by the nine big UK banks following an order by the Competition and Markets Authority. It is the technical infrastructure by which TPPs and banks communicate with each other. A TPP wishing to use the system will register with Open Banking and can then, through a set of standardised APIs, communicate with all the nine big UK banks, initially. All other banks may join this system if they decide to do so. It is therefore the technical underpinning which will allow the PSD2 rules to work in the UK.
As well as the technical interface among the providers, Open Banking has created detailed rules on what the system will look like from the point of view of the customer - for example, rules on what information the customer has to be given when they consent to allow a TPP to access their data.
What will happen on 13 January?
The changes made possible by PSD2 and Open Banking will take time to appear. Initially, the technical structure will have to be tested and verified to make sure it all works seamlessly and it will take time for new TPPs to ‘plug in’ to the system and to get their product offerings up and running.
It is then up to the customers! Each TPP will be putting their own service onto the market and promoting it. Customers will decide, according to the benefits they get, which services to use.
Is my data at risk?
Numerous present-day business models rely on the free access to customer data. PSD2 and Open Banking are different in that they give bank account users full control over what data to share and for what purpose.
Further rules will also increase the emphasis on security (financial data is the most sensitive data people have) and cyber technologies are becoming more and more sophisticated to cope with fraud risks. The General Data Protection Regulation, which comes into force in May 2018, will also force companies to improve data security.
techUK sees Open Banking as a great start towards a fully open, digital eco-system covering all financial services. Open, inclusive and transparent governance will be key and we ask Government to help build a long-term strategy to make this happen.”