Initially, the concept of «open banking» was implemented in the EU Second Payment Directive, but then was replicated in some form in other regions of the world as well. This is one of the most popular topics in the financial industry. In brief, Open Banking is a set of rules and procedures that govern information exchange between financial institutions.
What was the driving force behind “open banking”?
Financial market has been facing some issues for a long time and eventually these issues became part of the ‘normal’. Yet, progress and new technologies motivated regulators to think about eliminating some of these issues and changing the rules of the game. Changes were supported by two factors: emergence of new fintech players and growing trend towards cashless payments.
Payment cards dominate in retail cashless payments, yet the market is controlled by a few payment schemes. This might potentially limit the scope of non-card interfaces available to the consumers. Finally, market inefficiencies became a problem itself, as they were widening the gap between the supply and demand. For example, the traditional approach, when the account service is inseparably linked to the payment interface (for example, an Internet banking system), may slow down the emergence of new services.
Thus, in a narrow sense, open banking aims at unbundling the interface and account services.
What is "open banking"?
Basically, the Second Payment Directive limits control of the banks over the interfaces. Specialized company acts as an intermediary between the bank and its client. That intermediary, with the client's permission, gets access to their accounts. These intermediaries (information service providers) are organizations that do not open accounts for clients but have access to clients' accounts opened in financial institutions. Since intermediaries do not ‘touch’ money, the regulatory requirements for them are lighter than for financial organizations.
Technically, the bank is obliged to provide information intermediaries (information service providers) with access to the client's account via a special API (the "language" facilitating interactions between the information systems), free of charge and without a contract.
The three pillars of “open banking”
The concept of “open banking” is based on three elements.
The first one is the emergence of new types of information intermediaries (information service providers). They can only provide financial information aggregation and payment initiation services.
The second one is a ban on discrimination against information intermediaries (information service providers). The Second Payment Directive obliges financial institutions to execute transactions on the same terms, irrespective of how they are initiated – through the intermediary of the bank’s own system (e.g. Internet banking system). Thus, financial organizations lose their monopoly on the interface, including cards: now a client can open an account in one bank and get a card in another.
The third one is a standardization. “Open banking” involves the development of common principles and standards for interaction between financial institutions and information intermediaries (information service providers).
What to expect?
The main task of the regulator is to increase competition in the market. The consumer should have a choice of how to make and transmit orders for money transfer. Regulation aimed at increasing competition is an alternative to price regulation or state-mandated interface.
It is difficult to say which new interfaces the introduction of "open banking" will lead to. But we can envisage some trends that will determine the future of payment instruments:
Emergence of new players providing payment interface services;
Emergence (or wider usage) of non-card interfaces;
Emergence of self-updating interfaces;
Switch to subscription fee models.
Banks or merchants could act as information intermediaries (information service providers) as well (accept money, bypassing card payments).
To find out more about “open banking” and what it can lead to see our analytical reports and materials.
More on the topic (Russian)
Достов В., Шуст П., Open API за рамками PSD2: «Яндекс.Маркет для банков» // ПЛАС №7 2018.
Достов В.Л., Шуст П.М. Открытый банкинг, стандартизация и недискриминационный доступ: инициативы Европейского Союза по повышению эффективности рынка платежей // Известия Санкт-Петербургского Государственного Экономического университета. № 1(109)/2018. Стр. 34-38.
Достов В.Л., Шуст П.М., Новые европейские технические стандарты по усиленной аутентификации и «открытым API» - основные положения и актуальные проблемы // Банковское дело. №07.2017