PSD2: open banking and the future of payments
Gavin Littlejohn, Chairman FDATA Global and Fintech Stakeholder Group Convenor for UK Open Banking Implementation Entity, offers his thoughts on the impact of open finance and the need to regulate.
The world of finance has been turned on its head by open banking, allowing for the sharing of data with the aim of transforming customer experience. In Europe, and in particular the UK, fintechs have sprung up to both challenge and benefit incumbents. The urgency to prepare for APIs, the rise of challengers, and all open banking has to offer has been compounded by regulation. In 2018, the European Union implemented PSD2, the second Payment Services Directive, updating legislation for payments. The update acknowledges the rise of fintechs and will seek to ensure security and consumer protection while evening the playing field for challengers.
PSD2 will come into full force in the UK in September, and even with Brexit and the EU’s jurisdiction only applying to member states, such directives will have a global impact since any organisation that does business in an EU member state will be impacted. Gavin Littlejohn, Chair of the Financial Data Technology association which campaigns on banking and financing issues across the globe, also sits on the steering committee for open banking in the UK. “This has given me a lot of insight into how implementation takes place, the pros and cons and types of processes,” he comments. We caught up with Littlejohn at Money20/20 Asia to benefit from some of this insight into developments in the open banking arena.
Littlejohn says regulation is necessary with so many changes going on in the finance world, and can make life easier for both incumbents and tech startups. “If you look at the challenges of engineering, risk and complexity, it’s important – from both a regulatory and technology perspective – that we standardise the areas where it makes sense to standardise. From my own perspective as an entrepreneur as well as the companies I work with, you want to spend your time solving customer-facing problems – not problems with the plumbing.” Littlejohn says that the next big challenge finance is facing in the UK especially will be to implement PSD2 in a way that does not impede access or hinder the customer journey.
“Across the banking landscape, requirements are for financial services to sell their financial products in a compliant way, digitally”, he outlines. For this to work, organisations must endeavour to know their customer inside out and leverage that all-important resource, data. “The open banking and open finance movement will create a great opportunity for banks to be better at their job,” Littlejohn argues. “At present, from the customer perspective they suffer from relatively low access to financial advice. Any applications that help empower customers to solve their problems are only as smart as the data you put into them – so open banking enables that customer to see a true picture of their financial self.”
However, as huge as the rewards can be, when dealing with this data, it’s important to keep it safe and remember who has the right to it. As Littlejohn is quick to emphasise, data belongs to the subject, in this case, the customer. “The customer has the right to choose the services that better meet their needs, and yes, some customers will be fearful of sharing their financial data, but on the other end of the spectrum is the knowledge that you can only get a better outcome if you know you have the capability and the assets at your disposal to be able to compare and contrast.”
With permission, aggregating data can make life more seamless for any consumer dealing with their finances. “My experience of this domain is that customers have a variety of different details. A couple or family, for example, might have different credit cards and savings accounts, a family might have one account to pay bills and one to save for parties – and usually this is not all through the same provider. In order to facilitate simple things like budgeting and making good financial choices, then, being able to combine your data from different sources is really helpful.”
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This is already visible with big banks in the UK as well as fintechs like Monzo which work to equip customers with the right knowledge to make better financial decisions, and Littlejohn says that consumers and businesses alike are beginning to truly embrace such opportunities. “Looking at the UK model as well as other markets, the banking sector was very resistant to open banking to start with, but now they know they’ve got it they’re coming to understand it’s a great opportunity for them to get to know where their customers are when they’re not with them.”
Large banks are all beginning to move with the times says Littlejohn, and this is only set to continue. “If you were to go to RBS, Barclays, HSBC or Lloyd’s, you’ll be able to download and use their open banking app where you can see financial services as well as the fintechs in the market. There’s a lot of innovation and competition coming in.” In particular, PSD2 will also allow for third-party initiation of bank-to-bank transfer. “The alternative is peeling a card out of your wallet and making a payment that way, so there’s different pathways,” says Littlejohn, adding: “The payment capability, I would presume, will eventually be cheaper than paying via the card system. Then, one would also presume, eventually the actual user experience will encourage consumers to buy things.”