When the revised Payment Services Directive – PSD2 – was introduced in 2015, ‘Uptown Funk’ was top of the music charts, the ‘Fast and Furious’ franchise had only released its seventh film, and Barcelona won its fifth UEFA Champions League final.
In the eight years that have followed, it’s safe to say we’ve seen quite a few changes across pop culture, sport… and payments.
That’s why the European Commission’s proposals to update PSD2, published a few weeks ago, are a very welcome development. It’s a new policy package for a new time, renewing the promise of Open Banking.
Similarly, there are discussions happening in the UK which will determine whether the goals outlined in the Joint Regulatory Oversight Committee (JROC) report on the next phase of Open Banking in the UK are realised or not. So, it may now be a good time to reflect on what the history of PSD2 can teach us.
A tale of two implementations
PSD2 was a seminal piece of legislation. It introduced the idea of opening up bank account data to third party providers (TPPs) in order to improve competition, foster innovation and generate positive outcomes for business and consumers. While Open Banking may be commonplace now, this was an entirely novel concept in Europe when first proposed 10 years ago.
Tom Burton of GoCardless
As the UK was still part of the EU at the time, it tracked developments with PSD2 and was obliged to put the Directive into UK law by the January 2018 deadline. However, the UK Government had been exploring going beyond PSD2 for some time, having commissioned an independent report on data sharing and Open Data for banks as far back as 2014.
Some of the concepts in this report were picked up by the Competition and Markets Authority (CMA) when, in 2017, it ordered the nine largest banks in Great Britain and Northern Ireland to drive the rollout of Open Banking, effectively ‘gold-plating’ EU legislation due to kick in the following year. These measures included creating and paying for an Open Banking Implementation Entity (OBIE) tasked with establishing industry standards and guidance for dedicated interfaces, or ‘APIs’, so that customers could enjoy a safe and consistent Open Banking experience.
On the other side of the Channel, several bodies, such as the Berlin Group, similarly sought to introduce a technological standard for PSD2. What emerged was a raft of differing specifications that were open to interpretation, meaning bank APIs differed even when they were ostensibly following the same standard. Perhaps even more fundamentally, how each EU member state interpreted, implemented and enforced PSD2 varied.
In other words, an Open Banking experience felt, and still feels, more inconsistent and less user-friendly to customers in Europe than in the UK.
This higher degree of standardisation may also – at least in part – explain why the UK has seen more Open Banking-focused fintechs spring up than any other European country, creating the competition and innovation that PSD2 had intended. There are currently 221 registered TPPs in the OBIE’s ecosystem, whereas Germany – the best performing country in mainland Europe – has 166.
The UK’s strength in financial services and ready access to a concentrated pool of talent in the City of London were undoubtedly material factors as well here.
However, one notable point to call out, if potentially difficult to quantify, has been the role OBIE has taken on as a champion for the Open Banking industry and a forum for collaboration. That OBIE chair and trustee Marion King, and chief executive officer Henk Van Hulle, and their predecessors at OBIE, have fostered a constant dialogue between policymakers, regulators, banks, TPPs and others in the ecosystem means that Open Banking remains higher up the policy agenda than it otherwise would be, and even the smallest market players have a chance to make their voice heard.
For example, work co-ordinated by OBIE played a central role in developing ‘version 2’ of the CMA’s Open Banking remedy in 2020 and, more recently, in shaping JROC’s recommendations. No doubt the ‘Future Open Banking Entity’ that replaces OBIE will similarly play an important, flag-bearing and convening role.
Taking stock… and preparing for what’s next
So, what can we take away from these experiences? First, that customers want a consistent, high-quality experience. Neither the UK nor EU has nailed this yet, but it’s clear that regulation – or some form of state-intervention – is critical to creating the standards and infrastructure that act as foundation stones for Open Banking. However, for a genuinely sustainable framework to emerge, it’s likely that this regulatory ‘baseline’ will need to be overlaid with commercial incentives for all ecosystem participants, which doesn’t exist today. That is exactly what JROC’s work in the UK, and the EU Commission’s proposals, are exploring now.
Secondly, collaboration is vital. It’s only when policymakers, regulators, industry and other stakeholders come together and put the customer experience central to the discussion that workable solutions are found and executed.
As we move ahead, it’s interesting to see both markets doubling down and evolving their strategy rather than changing tack. JROC’s recommendations set objectives (building on the CMA’s Order), deadlines and the process for how ecosystem participants must work together to resolve the details. They also underline the UK’s commitment to a central body operating at the heart of the long-term regulatory framework for Open Banking.
Meanwhile, the EU Commission is looking to achieve similar outcomes by tightening regulation and enforcing greater harmonisation in how it’s implemented.
However, PSD3 and the new Payment Services Regulation (PSR) are only proposals at present; there is plenty of politicking to be done before they harden into law. With the prospect of EU elections likely to interrupt the legislative process, there is scope for surprises in Brussels.
Eyes on the prize
Open Banking is still in its infancy and the road to get here has not been easy. But the introduction of PSD3 is the perfect opportunity to remind ourselves of what we’re working towards: more innovation and competition in a dynamic and thriving financial ecosystem. Increased security, control and convenience for Open Banking users, whether they be consumers or businesses. And additional opportunities for merchants, from more cost-effective payment methods to greater access to funding.
It’s a challenge, but we certainly think the reward is worth it. And by taking the hard-earned lessons from PSD2 , we can better position ourselves to achieve this vision.
Tom Burton is director of external affairs and public policy at GoCardless
Listen to Tom Burton discussing JROC’s recommendations for Open Banking in the UK on the Open Banking Expo Unplugged podcast, with Stephen Wright, head of regulation and standards at NatWest’s Bank of APIs, and TrueLayer’s head of public policy Jack Wilson.
