Future historians are likely to look back and declare open banking to be as revolutionary a change as was the UK’s Big Bang deregulation of investment banking in 1986. Whether this will turn out to be the case remains to be seen, but the starting gun was fired last weekend (January 13) when the European Union’s second Payment Services Directive (PSD2) came into force.
Open banking is the ability to share bank account data with trusted third parties (TTPs), some of which will be able to initiate payments from the account. It was largely conceived by regulators and politicians to force banks to become more competitive both among themselves and in the face of technology-enabled new entrants to the market.
But the real revolution won’t take place in the consumer sector where the legislators intend it to. In the medium-term, the effects of PSD2 (and the UK’s slightly different approach) will be felt by corporate and business banking customers, who will benefit from capabilities such as easier access to multiple accounts held at multiple institutions through APIs, but will also face challenges and costs relating to data privacy under the General Data Protection Regulation.
In the short-term, with the focus on consumer banking, the reaction outside the banking world is understandably muted, and even actively hostile as press reports concentrate on the opportunities for fraudsters.
At a distance of 30 years, the Big Bang tag hides the fact that there had been years of preparation for the changes in the London Stock Exchange rulebook in October 1986 that led to international investment banks, particularly the US giants, setting up in London and snapping up the existing old guard stockbroker firms.
It also hides the unforeseen consequences, some of which set the scene for the financial crisis of 2007/8, that stem from the fact that legislation doesn’t happen in isolation. Just like the Big Bang, open banking is set against a backdrop of other social, political, and technical changes, many of which are hard to predict with any certainty.
Access to account data and payment initiation by TTPs are just the requirements of PSD2, and the real revolution lies in the choice of APIs as the technology solution. This is happening at a time when countries around the world are implementing real-time payments infrastructures. The US and the Eurozone went live at the end of 2017, and Australia and international payment mechanisms are under increasing pressure to follow suit.
The API-enabled automation of payments and integration with business processes provides opportunities to innovate far beyond consumer banking, great as the opportunities there are. Tax authorities, for instance, could make it easy for citizens and businesses to file their returns and have their liabilities calculated automatically. Other technological changes such as the Internet of Things could lead to device-initiated payments (the autonomous vehicle market is often cited in this context, with cars paying for parking), with blockchain ledgers keeping track.
All of these things and more are possible. Some version of them will come to pass, but the reality is that the really big shifts will come when several small things come together. PSD2 creates a legal framework for open banking where real-time payments infrastructures create a platform and API access to accounts provides a mechanism to bring it all together.
What it turns out to be, who knows? But it will be revolutionary, eventually.
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