Regulating Open Banking

Digital Citizenship
March 10, 2020

Regulating Open Banking

Financial data systems are becoming more standardized and interoperable, facilitating access to banking infrastructure and analytics for third parties.

Key Insight

Financial data systems are becoming more standardized and interoperable, facilitating access to banking infrastructure and analytics for third parties.

Why It Matters

The European Union and the U.K. recently passed laws requiring banks to create application programming interfaces (APIs) for third-party developers. This should bring standardization to open banking and give the E.U. and U.K. a competitive advantage over the U.S., which has no such laws on the books.

Examples

In the E.U., a fintech company can access APIs by registering as an “account information service provider” (AISP) or “payment initiation service provider” (PISP). In November 2019, Open Banking Europe, an initiative operated by EBA Clearing subsidiary Preta, published a directory to list all publicly available bank APIs in the European Union.

The European regulation known as Payment Service Directive Two (PSD2), which went into effect in 2018, requires banks to enable third parties to access a customer’s financial data. PSD2 lays the foundation for new players to use financial transaction data to improve analytics behind product development, predictive analytics, fraud analysis, marketing, and a la carte services within an ecosystem of providers.

What’s Next

Regulation will change the ownership structures of financial data. Interoperability will make it easier for customers to aggregate finances and choose a la carte services from various providers to best suit their needs.

We expect disruptive fintech innovators to build functionality that attracts a critical mass of consumers, which will then trigger large incumbents to seek partnerships or acquisitions. The most successful players will be those who can get access to the richest data and can effectively productize data-driven insights. This would likely be through personalized marketing and operating efficiencies, such as reducing fraud and chargeback rates.

The Impact

New standards will make it easier for vendor integration, compliance, reporting, and data management.

Watchlist

American Express, BBVA, Banco Santander, Citi, Clear, European Union, Fidor, HSBC, Intuit, iZettle, Klarna, Lloyds, N26, Mastercard, Monzo, Open Banking Europe, Plum, Square, Visa, Wells Fargo.