By Gerhard Greyling, head of financial services at Wipro Limited.
We have already seen huge changes in the world of banking. Digitalisation means that people are banking from their mobile phones, making payments via barcode scanning and even in some cases transacting using cryptocurrency. Home loans can be approved in almost real-time, and a selfie can be used to open a bank account – all without ever physically entering a branch.
However, this is just the tip of the iceberg: the banking world is about to be shaken up, thanks to a legislation known as the European Union Payment Services Directive 2, or PSD2.
PSD2 and the concept of ‘open banking’
PSD2 is not a new concept, having been adopted by European Parliaments in 2015 with the express purposes of contributing to a more integrated and efficient payments market, levelling the playing field for payment service providers, driving competition which lowers the cost of payments, and protecting consumers by making payments more secure. South Africa will not remain unaffected by this legislation, and local financial institutions, their customers, and the payment industry stand to benefit as much as those across the seas.
The growing adoption of PSD2 is paving the way for a concept known as ‘open banking’. Open banking refers to the use of APIs and open source technology to enable third party developers to access data traditionally held by financial service providers, or banks, and build applications or services around this data. It also allows consumers to control the transparency of their data, equipping them with the power to allow the sharing of their data with selected third-party providers to offer them services based on their financial information.
Open banking has been fuelled beyond the borders of Europe as regulators of more than half of G20 countries being expected to create open banking API standards by the end of this year.
The rise of third party FSPs
Essentially, PSD2 means that banks will no longer be the only, or main, stakeholders in both the control of consumer financial data and initiation of payments. The legislation gives rise to the inception of two new types of players that will create a more competitive banking environment by lowering payment costs and providing more choice for consumers.
Account Information Service Providers (AISPs) are emerging as new operators in a world traditionally dominated by banks. AISPs are able to access consumer financial information from multiple financial institutions at the express permission of consumers.
They analyse this data in order to determine a consumer’s spending habits, financial behaviour, and financial history. This data is then collated and consolidated into a single overview on the consumer, which the consumer can then request to be shared with third parties who can tailor services around their specific profile.
Payment Initiation Service Providers (PISPs) are providers who initiate payments on behalf of a consumer. Although we currently have many payment options, they all still pass through a bank. PISPs will enable services such as peer-to-peer payments and bill payments without touching a traditional financial institution.
The rise in competition for both banks and competing PISPs means that the cost of payments will lower significantly, and consumers will be able to better control how they make payments.
Click here to read more benefits and challenges of open banking.