Open banking: what it is and how it works
In 2019, at the end of two years of planning, the directive on digital payments, issued on January 13, 2018, came into force in all European Union countries: the PSD2 (Payment Services Directive 2). This is the turning point for the world of finance, which is beginning to experience what open banking really means, both from the point of view of banks as well as that of companies and end users. This is a real revolution of which even now, after more than a year, we can only imagine the effects because it has given rise to so many new business opportunities that we are discovering month after month. It is only in the last months of 2020, in fact, that we have begun to see concrete benefits.
Open banking and PSD2
The PSD2 directive obliges European banks to open up their APIs (Application Program Interfaces) to fintechs and all those companies that deal with financial products and services. This means that external companies (known as third parties) can have access to payment data and can then imagine new business models that enhance it.
This legislation is a key step in the creation of a European digital single market. In addition to obliging the banking sector to share the data in its possession with other authorized third parties, thus guaranteeing greater competitiveness, it also has other important objectives such as raising the level of security of transactions, through Strong Customer Authentication (SCA), accelerating the process of innovation in the banking market and definitively sanctioning that the ownership of data belongs to customers.
Open banking: what it is
The term open banking indicates the sharing of data between the various players in the banking ecosystem, if authorized by customers, as indicated in the PSD2. This new way of banking that is more open, more accessible and easier, both for customers and for companies, is changing the scenario and the European payments market, marking an important break with the past. It changes the rules of the game, encourages competition but also the creation of new alliances between different players in the ecosystem that we would never have imagined working together before to create value-added services for end customers.
Open banking: how it works
To understand how open banking works in practice, it’s necessary to talk about APIs. The term API stands for Application Programming Interface. It is a software intermediary that allows two applications to talk to each other. Thanks to APIs, it becomes easier to develop a program by providing “building blocks” that allow developers to not start from scratch and therefore be much more productive as APIs often make repeated, but complex processes, highly reusable with very little code.
Going back to open banking, forcing European banks to open up their APIs and customer delicate data, therefore, means allowing third parties, fintechs or other financial services companies, to build their products and services “around” that data.
What changes for banks
At first, banks may see open banking as a threat because they no longer have a monopoly on data and are forced to open up and share it with companies that from certain points of view may become their competitors in providing financial services to the end customer. In order not to succumb, banks have had to make a radical transformation by embracing the logic of open innovation. No longer having exclusivity over their customers’ data, in order to remain competitive in the market and offer services and products that meet their needs, what banks can do is start collaborating with fintechs by taking advantage of their agility and ability to specialize on vertical themes. The banks that have started this journey of openness and collaboration in recent months have been able to experience how the advantages of open banking outweigh the disadvantages, and we are only at the beginning!
What’s changing for fintechs
It’s easier to understand what the benefits of open banking are for fintechs and financial services companies who, thanks to PSD2, are faced with so many business opportunities they were previously cut off from. Competition is fierce in this field and these months are decisive for establishing oneself in this market space. There are fintechs that have focused on the creation of financial services based on APIs and data they had available, and others that have chosen to build strong partnerships with banks, eager to launch open innovation projects in order not to lose their customers.
Open Banking: glossary
We are faced with a completely new world of finance in which the protagonists have changed as also the relationships, balances and dynamics. In this context, new roles and new ideas are born, and we associate terms and acronyms to define them. That’s why we have decided to create a glossary to guide you through the many opportunities of open banking already known and those yet to be discovered.