Open Banking and Banking Transformation

The entry into force of the new European Directive "PSD2 (Payment Services Directive)", which began to apply from 13 January 2018, now allows the processing of Customers' bank account data by third parties and not exclusively by Banks as before. It inherently triggered the introduction of a new, broader concept of the European banking market itself: an open and easily accessible ecosystem for all customers and all entities.

This concept, called Open Banking, translates a new banking relationship model, based on information sharing and transparency, in which collaboration between financial institutions, fintechs and other entities is inevitable, as only in this way can they better meet and satisfy their customers' financial needs.

This directive will allow a new positioning of the consumer in this market, more central and informed. Until now, the significant technological development of recent decades has not been accompanied at the same pace in terms of consumer knowledge and behaviour, despite the diversity and multiplicity of supply, as well as the strong investment in technological transformation that banking has made globally.

While financial institutions have invested heavily in digital transformation to make the "customer journey" through banking services easier and more appealing, it is also true that satisfactory results have not been achieved in simplifying the language and understanding of products and their contractualisation. As a rule, information on products, services and their terms and conditions in the financial market is somewhat complex and quite technical, which does not allow a quick and direct interpretation of the products presented.

Moreover, with an increasingly diversified offer, consumers in this sector do not have an effective way of comparing existing banking products with what they can do in other industries.

Although we are still at the beginning and laying the foundations of Open Banking, the principle of this transformation is quite simple, and the financial market is increasingly receptive to changes in various dimensions such as innovation, security and efficiency.

Everyone benefits from this transformation: not only the larger financial institutions, but also smaller banks, fintechs and, of course, consumers. On the other hand, other big names in the technology industry, such as the so-called "GAFAM - (Google, Amazon, Facebook, Apple and Microsoft)" will also be able to take advantage of these new measures if they know how to define the right strategy.

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What is Open Banking based on?

As of January 13, 2018, in the European area, the non-exclusive retention of information relating to customers' accounts by banking institutions has been defined, and this information may be transferred to third parties, usually referred to as Third Party Providers (TPP), with the proper consent of the user/customer. Thus, with this opening of data processing by third parties, and these in turn being fully focused on providing personalised information services, highly supported by software prepared for mass data processing, it is now possible to open up new channels, spreading decision making and statistical processing tools of great precision in favour of the users of banking services.

Although the standardisation process of this new banking information communication protocol is still in progress, it is now natural to access virtual platforms with a great diversity of banking products from various financial institutions and therefore choose the most relevant products for current and future financial needs.  

What new entities will change the traditional banking relationship?

In addition to the new fintechs and the transformation that financial institutions will inherently have to implement, two new types of purely technological service providers have officially emerged on the financial market, regulated by the European banking authority. Thus, AISP (Account Information Service Provider) and PISP (Payment Initiation Service Provider) are now the new acronyms to be known in the European financial ecosystem.

Both the AISP and the PISP are entities that have been created on the basis of security in order to provide this type of service exclusively through the consent of the client.

Let's start with the AISPs.
The IPAs, considered to be the companies that manage and provide bank account information, are technological entities that are authorised to collect and store information from the various bank accounts of each customer, as well as validate the sharing of this information with the institutions of their choice.

Let's move on to the PISPs.
The PISPs, or also called payment initiation service providers, are considered to be the entities that mainly facilitate online payments. They provide a direct link between the customer's account and the merchant's account, being able to consolidate the payment without going through any intermediary.

In short, we now have access to a new banking relationship model, developed with the customer in mind, with new opportunities arising as a result. In general, we are witnessing the diversification of several roles within the banking and financial market, reinforcing the pillars of data democratisation, with mandatory security and confidentiality, as well as the introduction of freedom of choice in a more assumed way, as a result of this new "library of data" available to the user.

Amongst several innovations, these new companies can then aggregate information on all their consumers' bank accounts, as well as aggregate information on products from several financial institutions. It seems, therefore, unquestionable that the simplification of the usually complex banking operational processes will gain its space, which, from the point of view of companies and business professionals will save a lot of time, promote efficiency and reinforce the strategic focus on the "core" activity of each company.

Other innovations are appearing and many more will come as a result of this new paradigm.

Open Banking, that is, the open, easily accessible banking ecosystem is here to stay and there is a strong predisposition for current financial institutions to also be receptive and collaborate strongly with fintechs such as nBanks and many others to ultimately meet the financial needs of their customers.

Nobody knows for sure what the future banking and financial model that European legislation is generating with the new PSD2 (Payment Service Directive) will look like.

We know, however, that the paths of transparency, impartiality and shared information will help steer the right path for this new model.

It is now in our hands to make use of the much needed banking transformation.

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