The evolution of open banking

We’re in the midst of some major changes in the world of online financial services. From the early days of mobile banking apps to the rise of alternative payment methods, the services available to consumers are continually improving. Despite such services feeling like a standard part of everyday online life, we’re still at the cusp of these changes. Open banking is at the heart of this drive for improvement. Although the concept of open banking has been around for some time now, the introduction of the European Union’s (EU) payment services directive (now PSD2) led to a growth in FinTech and startup companies offering numerous financial services to customers. It also looks like there will be some potentially huge changes coming to open banking within the next few years that could lead to further developments in open finance.

What is open banking? In a practical sense, open banking is a technology-driven approach to financial services, giving third-party providers (TPPs) access to customers’ financial data (with their express permission). This is possible through the use of application programming interfaces (APIs) to build services that can serve customers. Putting it simply, non-banks can offer banking functionality through apps, for example. There are, of course, benefits to open banking, which include:

• the freedom of choice and autonomy for consumers
• more competition and innovation for the market
• increased accessibility of services (increase in choice)
• speeding up customer approval and onboarding processes
• enhanced customer experiences (saving time through quick, direct payments)
• decrease in processing costs
• standardized use of APIs = lower cost for all parties

Early attempts at open banking (initially referred to as ‘access to accounts’) have occurred over the last decade or so, some less successful than others. However, it wouldn’t be justifiable to refer to these as failures. There was, until recently, an issue with scalability and interoperability when trying to integrate various systems to allow access to account data. This was no easy feat, requiring at the time high levels of maintenance and manpower which was difficult to manage.

So what of what the beginnings? The global financial crisis of 2007-08 played a major role in leading to demands for an overhaul of the banking system that would challenge the dominance of banks and lead to an increase in competition. The real jump-start for open banking came with the revised payment services directive in 2007 (PSD1) and 2016 (PSD2) leading to legislative requirements for Account Servicing Payment Service Providers (ASPSPs) to allow third-party providers to access customer accounts. Traditionally, ASPSPs are banks and similar institutions. Under PSD2, all ASPSPs in Europe are now required to participate in open banking and provide access to the data.

The principles of open banking may have been forced upon banks through legislative measures, challenging their market dominance, but it has also led to improved services for banking customers. Beyond giving customers more control over their data, it has also led to Improved security beyond ineffective 2-factor authentication (2FA). Open banking is not just about giving TPPs access to customer data for any old reason, it is intended to increase competition and innovation.

The evolution of open banking has had its pros and cons, the most important advantage being the sharing of data to improve services. Unfortunately, many consumers are not fully aware of how open banking can benefit them, and the use of the term ‘third party providers’ leads to concerns about how much of their data is being shared and how it is used. This perception is gradually changing as more and more services are being offered to consumers; many of which have evolved through the opportunities provided by an increase in innovation and competition afforded by open banking principles. It’s also important to remember that the EU’s General Data Protection Regulation (GDPR) includes fines of up to €20 million (or 4% of a company’s turnover) for organisations that do not take data protection seriously.

Take Nethone’s advanced fraud solution as an example. The sole purpose of our FinTech is intended to protect companies and their customers during the use of eCommerce and financial services dealing with payments and transactions. We are a fraud-fighting company that intends to stop fraudsters, protect customers and help enhance the overall service experience through frictionless payments and transactions. As is standard with open banking, access to account data is encrypted with the highest level of security.

What can we expect in the future? As things stand, by law, third-party service providers only have access to customer data with their permission, but part of the recent PSD2 review process sought feedback about whether to extend access rights to more customer data and services (of course, the customer will still have control over this process and must grant permission).

According to the EU commission, open finance refers to third-party service providers’ access to (business and consumer) customer data held by financial sector intermediaries and other data holders for the purposes of providing a wide range of financial and information services. The expansion of open finance or other financial services data that PSD2 consultation respondents would like to be able to access via third-party providers includes mortgages, savings, pensions and insurance services.

The ramifications for such changes could be huge, potentially leading to a PSD3, requiring modifications to the Retail Payment Strategy, the Digital Finance Strategy and the overarching EU data strategy. If the goal for Europe is to encourage Open Data, then the foundation for that Open Data society and the interaction with financial services need to be laid now. The legislative changes would be huge, but operational challenges for businesses must also be addressed.

Still, the largest concern remains the risks associated with data protection, fraud and cybersecurity. This is where innovative companies such as Nethone can help to ensure customer data is protected throughout a service’s customer journey; from account creation, to use and making payments and transactions.

How? By fully understanding every user of e-commerce or financial services. Using machine learning (ML) models to analyse behavioural biometric and digital fingerprint data, it is possible to determine who is a genuine customer and who is, perhaps, an automated bot or human with fraudulent intentions. Open banking has aided Nethone in being able to access and use data to create and continually improve advanced fraud solutions that work automatically, passively and in real time. The solution to any perceived future stumbling blocks in regard to data protection, online payment security and friction are already available. They are continually evolving and will certainly be able to meet the challenges that may arise through the evolution of open banking.

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If you liked our text about the evolution of open banking and you would like to know how to incorporate the latest anti-fraud systems into your business, let's talk. Click 'book a call' at the top of this page or contact Neil directly via email at neil.smith@nethone.com or via LinkedIn.