Liberation: Banking

So, if you’ve been following the news lately you probably have heard ‘PSD2’ and ‘Open Banking’ mentioned at least a couple of times. 

There’s a lot of fuss going on about them and we wanted to prepare all that we could find into a short article to get you up to date.

What is PSD2? 

PSD2, formally referred to as the Second Payment Services Directive, is a regulation that covers the entire European Economic Zone. 

PSD2 has been on the radar of European economies since 2015. It’s a major step towards keeping up with the rapid digitalization of the commerce industry. 

PSD2 aims at making online payments more secure through various regulations that make online fraud much more difficult and third parties more accountable. 

If you are remotely interested in finance and fintech you probably know all of these already. In case you have no idea what PSD2 is, you can check this comprehensive guide about the PSD2 regulation.

Other than regulating and securing the way online payments are done, PSD2 actually has paved the way for one of the biggest finance experiments ever.

What is Open Banking and Why Should I Care?

Open Banking is a gigantic experiment that is set to liberating the banking sector by returning the control of financial data to consumers. 

This is possible thanks to a small detail that was introduced with PSD2. PSD2 allows third-party financial services to access banking data easier and more secure. 

A bit of a history lesson here. Personal finance solutions aren’t something new and there are many successful companies that have provided such services. However, what they lacked was a consistent and secure way of getting access to the financial data of consumers.

The widespread method that these solutions relied on was named as screenscraping. When using third-party financial assistants, users would provide their username and passwords to the third-party software and the software would periodically login into the bank accounts and save the screen of the account information.

Based on the data they gathered, they would give suggestions to the user on how to better spend their money.

As you can guess, screen scraping wasn’t the most consistent or safe method of gathering user data. After all, who would feel safe sharing their banking credentials to someone else? On top of that, if you were using multiple banks you wouldn’t have a complete picture of your finances.

This is where PSD2 promises a safer and better ecosystem for third-party financial services to thrive. 

In addition to making online payments safer, PSD2 also has provisions that aim at liberating banking data. Traditionally, your financial data (how much you spend, where you spend, what you but, etc.) was kept safe by banks. Now, to be honest, banks have historically done a great job of protecting their clients’ financial data. 

The only problem here is that the data does not belong to the banks. It belongs to the consumers who normally have almost zero control over how the data is utilized. 

With PSD2, banks will still be the keepers of the data. But, they are forced to share the data with verified third-party services only when requested by the user. This will be done through an Application Programming Interface (API). So, you won’t share your password with anyone and your data will be provided from a safer and more reliable channel. 

Even better, you get to decide which data points will be shared. An option that was previously impossible through screen scraping. 

By default, you shouldn’t care too much about Open Banking unless you’re relying on 3rd party financial service providers.

Is Open Banking Good?

On paper? Yes.

However, we still don’t know how things will play out. 

The main idea of Open Banking is that it will transform the banking sector in such a way that it will become more competitive and innovative. 

By giving control of the data back to the consumers and lowering the barriers to entry drastically, open banking is expected to force banks to innovate and adapt to the digital realities of our time. 

The lower barriers of entry might make banking more competitive which should force banks to improve the quality of their services and also constantly innovate. At least that’s the assumption. 

More actors, more transparent banking, better services, constant innovation. This is what awaits us if Open Banking will succeed.

Let’s not get ahead of ourselves for a second here. 

All of these sound great but Open Banking is an enabler and not a proposition in itself. It is what companies do with Open Banking that will make it a success or not. 

It’s true that competition fosters innovation but we need to ensure that innovation only happens to benefit customers and/or clients.

If customers don't understand the value they're getting back they won't share their data and Open Banking will fail.

Author Name: Su Kaygun Sayran

Author Bio: Grown up in various corners of the world, Su loves writing about all things tech. His experience with various SaaS businesses has enabled him to carry his passion for writing into the tech industry.