A new era of open banking: Transitioning from PSD2 to PSD3
06 / 06 / 2024
In the ever-shifting finance landscape, regulatory frameworks are pivotal in shaping the industry's direction. Regarding open banking, this is truer than ever as financial solutions and customer expectations continue to become more dynamic, challenging, and technology focused. At EBAday 2024, the past, present, and future of finance and payments will be on the discussion table. In anticipation of the event, we sat down with Jani Ristimäki, Head of Financial Services Consulting at BearingPoint Finland, to discuss what the transition to PSD3 is set to bring as well as broader changes in the payments landscape and the underlying reasons for regulatory change.
PSD3: Set to unleash the full potential of open banking?
Initially introduced in 2007, the payments service directive aimed to standardise payment services across the European Union (EU) and foster competition within the market. However, as technology and consumer expectations evolve, so must the regulatory framework governing the financial sector. PSD2, introduced in 2015, aimed to foster innovation and competition by opening banks' data to third-party providers through APIs (Application Programming Interfaces).
However, the realisation of open banking's full potential under PSD2 fell short of expectations. As Jani says, "What happened following PSD2 did not meet expectations - fintechs did not disrupt the whole industry, and open banking use cases have been rather limited, focusing mainly on the personal financial services. Perhaps the biggest impact has been seen in corporate banking, where some banks have leveraged APIs to improve and enhance their payment and cash management services and integration into their corporate customer's processes."
While some advancements were made, the impact on retail banking remained limited. The transition to PSD3 signifies a renewed focus on enabling a more competitive and innovative banking ecosystem. "With PSD3, the banks need to ensure the availability of APIs or third-party service providers with the same SLAs and developer experiences as their own," says Jani. "Banks cannot discriminate against third-party developers and favour their internal service development, emphasising the need for their services to be competitive and add value for the customers."
This shift underlines the need for banks to enhance their services while leveraging third-party partnerships to complement and improve their development capabilities. Furthermore, PSD3 addresses consumer protection and fraud prevention issues by requiring processes such as Verification of Payee and a consent management dashboard, enhancing end-users' control over their data and strengthening fraud prevention measures within account-based payments. "They can now see to whom they have given consent to use their account information, giving them greater control over their data and how it is shared. This is a key driver for PSD3."
Regulation requires adaption but drives innovation
As financial institutions adapt to these new requirements, the focus extends beyond compliance. Institutions must seize the opportunity to leverage regulations to create new business opportunities. By embracing a holistic approach encompassing various payment-related regulations and frameworks, institutions can better address customer needs and drive market innovation. "It's good for banks to remember that in the end, it's the customer's needs setting the markets," says Jani. The regulation sets the ground rules for the markets.
With the EU's impending mandate of instant payments, new opportunities are emerging for account-to-account payments. Real-time payment initiation services offer the potential to revolutionise payment processes, streamline supply chains and enhance the overall end-user experience. Leveraging these capabilities opens new use cases, such as changing how individuals are paid, further driving financial inclusivity and efficiency. "With mandatory instant payments, there is likely to be some cost benefits since card payments are typically considered a bit more expensive," says Jani. "This is especially true of the retail and account-to-account payments. But, the big benefit promises to be the ability to design new use cases, such as more immediate salary payments."
Pursuing a seamless end-user experience
Open banking and the transition to PSD3 allow for the further creation of seamless end-user experiences tailored to local preferences and needs. To this end, understanding consumer pain points and merchant requirements is essential in designing solutions that resonate with diverse markets. "Regulations and innovation are setting the standard for what the 'excellent' end-user experience looks like," says Jani. "This also sets expectations from consumers and merchants, such as how payments should work. So, ultimately, it is making it much easier to build new and impactful end-user experiences in digital and online environments where you do not have any physical restrictions."
Data is crucial in this endeavour, empowering institutions to glean insights into consumer behaviour and preferences. By harnessing data effectively and collaborating with partners, institutions can develop innovative payment solutions that address specific use cases and drive customer engagement. "Using data to maximise the potential that regulation supports allows you to blend elements from the physical and virtual or online world, and embed payments and other financial services even more seamlessly in customer journeys," says Jani. "A simple example how digital and physical worlds are merging is, when grocery shopping in the supermarket, a consumer could use their mobile phone to scan the item and pay online within a digital user experience. By using some imagination and data available through APIs, similar embedded user experiences can be applied also in multiple other use cases."
In conclusion
The transition from PSD2 to PSD3 is just one part of a new era of open banking, characterised by increased competition, innovation and consumer empowerment. It serves as one piece of a broader puzzle, with frameworks and regulations needing to align for true potential to be achieved. For financial institutions, the key to successfully navigating these changes lies in embracing innovation, leveraging data and prioritising customer experience. In doing so, they can unlock the full potential of open banking, driving positive outcomes for both consumers and the financial industry as a whole.
Jani Ristimäki
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