With an upcoming PSD2 deadline, many European banks are falling behind the curve. We look at why APIs and open banking are critical for scaling and what US banks can learn from what’s happening across the pond.
Financial institutions (FIs) in Europe face a looming PSD2 deadline next month, causing a stir within these organizations to ensure that stronger customer authentication, access to accounts (XS2A), and other requirements are in place. In short, third-party providers (TPPs) should be able to access banks’ data through application programming interfaces (APIs) by September 14th. If the last PSD2 deadline in March was any indication, there may be many who are out of compliance.
Business Insider reported earlier this year that 41% of European banks were not in compliance with the March deadline that required the banks to provide a testing environment for TPPs. That means these banks will be playing catch-up for this upcoming deadline, and may be at risk to miss it. This also means that TPPs will struggle to be fully operational with API connections by September.
More importantly, banks are missing out on a momentous opportunity to build out more personalized, value-added services for their customers—a cornerstone to success in an open banking era where customer-centricity separates the winners from the losers.
PSD2 has been viewed as the driving force behind banking across the pond, with many banks viewing the shift as more of a compliance play than a growth one. Many banks view this shift as a threat rather than a commercialization opportunity. The truth is, many of the tenets of PSD2 are rooted in customer preferences as well. Customers want better security, more personalized offerings, and frictionless payments—all of which banks have been hard pressed to deliver in a timely manner.
Rather than fighting the system, banks should be capitalizing on the opportunity to innovate and better serve customers. By partnering with TPPs, banks can create a more tailored suite of products and services that attract new customers and better retain current ones. One example is Citi’s Treasury and Trade Solutions, a unit of Citi, which developed a new business unit that allows consumers to make digital payments to institutions. The service allows institutional merchants to collect payments from a variety of sources, including cards, digital wallets, and new bank transfers. This type of instant collection via open banking rails is a less expensive option than cards for ecommerce merchants.
While strides are being made to embrace open banking, some are still missing the boat when it comes to addressing the underlying issues that are spurring this type of change in the first place. One such issues is the clunky user experience resulting from fragmented APIs.
Seamlessness is at the heart of payments, and seamlessness requires standardization, adherence to best practices, and protocol. To scale, the open banking universe needs to address fragmented API standardization, which can actually have the opposite effect when not addressed.
Standardization will not only aid the open banking movement, but will quicken the pace of innovation. If the goal of open banking is innovation fueled by connectedness, the connectedness factor has to be rock solid. Unfortunately, with over 4,000 banks in Europe using somewhat inconsistent standards, these necessary connections are suffering.
The key is for banks to view fintech partnerships via open APIs as a way to better engage and retain customers. It enables faster development of more customer-centric offerings. Even in the US, which is outside of the PSD2 directive, banks stand to benefit from APIs. Many banks already use private APIs within their own organization to improve operational efficiency and some are experimenting with partner APIs to expand to new channels and broaden product lines. US banks have perhaps been slower to adopt an open API mentality because of security concerns; however, consumer sentiment around open banking is unmistakable. American Banker points out that by 2017, 87% of people preferred adopting a fintech application over using a product or service offered by a traditional financial services provider.
While the US is behind Europe in terms of open banking, many predict that forward-thinking FIs that are already beginning to adopt an open banking model will spur others to do the same. Additionally, consumer desire will likely move FIs in that direction as calls for greater transparency and choice are heeded.
Open banking certainly offers more visibility into the third-party ecosystem—for banks, consumers, and regulators. This visibility should be embraced by FIs, who could greatly enhance offerings and technology to better meet the needs of customers. In an open banking world, FIs are not only creating products but acting as sources of data. Many banks don’t have the visibility they would like into third-party tools connected to their data. Greater transparency is a boon for all, especially banks, who must often foot the bill for fraudulent activity where the source is unknown. A pivotal point is ensuring that third parties that have access to FI data are meeting security standards.
The move towards open banking is slower than anticipated, but the ecosystem continues to forge ahead. Forward-thinking FIs—especially in the US—should consider the myriad of benefits that open banking affords. In addition to increasing the depth of product lines, open banking facilitates innovation and improves speed to market. While security will always remain a concern, partnering with fintechs that have a proven track record in this area can prove to be beneficial in propelling proactive FIs to the front of the line when it comes to consumer preference.