As discussed in previous articles, the goals and results of PSD2 and Open Banking have been mixed when it comes to implementation – despite PSD2 aiming to standardise the payment landscape, the era of Open Banking has been a lot more uneven, with fragmented interpretations of what ‘open’ really means.
The need for greater innovation, harmony and a standard approach within the EU financial market is even more evident by the rise of BigTechs. Tobias Adrian rightly pointed out that BigTechs can use their knowledge of consumer preferences obtained through their other business areas and the data they already have on consumers such as consumer spending habits to offer financial services to customers who may be underserved by traditional financial markets.
European legislators are currently undertaking a comprehensive review of PSD2 to assess whether legislation remains fit for purpose. In parallel to the evaluation of PSD2, the Commission through the Digital Finance Strategy demonstrates its ambition for a broader ‘open finance’ framework with a legislative package including the Regulation on Instant Payments, the Digital Euro and the rulebook on the SPAA Scheme. In addition, strengthening cyber resilience through the Digital Operational Resilience Act (DORA).
Here we explore the risks and opportunities available to the market through technological solutions that can streamline the compliance process while enabling the creation and monetisation of new services.
Understanding regulatory mindset
While the EC has ambitious goals, the practical reality is that any implementation of regulations increases the costs for market participants – licensing fees, hiring and training of personnel, appointing outsourced compliance teams and developing compliant systems. All of this has a direct impact on market participants’ profit margins.
These are costs which small start-ups often cannot carry and creates a high barrier to entry for newcomers. For larger institutions, new regulation, in an already heavily regulated regime, may mean a slowdown in innovation while they ready themselves for the change.
The industry is presented with the challenge of striking a balance between commerce and compliance – innovating services without falling short on the ever growing list of regulatory demands.
For regulation to be successful, three elements need to be present:
- Consistency in approach and enforcement among regions and verticals.
- Clarity in obligations and routes to compliance.
- Cost-effective implementation that matches the capacity of the market.
For any open banking product launch to be successful, it must not only meet existing standards but keep in mind the future rule changes to avoid expensive re-development and scoping.
This means that for traditional players to embrace open banking in a standardised, compliant format will require a more flexible technological infrastructure. Given the complexity of legacy technology stacks and the high costs associated with any core system replacement, innovation will require working with new partners.
Managing risk with partnerships
Banks and large institutions are experts at managing risk and regulatory compliance internally, but opening up technology to third parties raises the bar for compliance, moving from the closed and internally controlled environment of large financial institutions to a level of dependency beyond existing processes.
When integrating with third parties, institutions will need to ensure that the third-party fintech is secure, stable and that they are fully compliant with relevant regulations. Considerations include:
- Data transparency and control from end-to-end: Implementing data access and assessment frameworks to ensure all parties know at any given moment where the customer’s data is and who can access it.
- Third-party risk with partners: The downstream data journey – checking not just partners, but their partners’ partners and the wider technological ecosystem.
- Audit: Checking partners’ approach to cyber resilience, data security and the ability to provide assurance to regulators.
This has the potential to add significant extra due diligence to partnerships in the financial technology space. However, there are methods that institutions can use to accelerate the process, for example by working with fintech partners who are already regulated, ensuring a baseline of compliance knowledge.
Choosing the right technology partner
Traditional players will need to work with partners who are both well versed in regulatory compliance and swift to adopt a market change to drive innovation and provide customers with modern payment solutions.
Payconiq International is a digital enabler for some of the continent’s largest payment processors, including iDeal, and is a partner of the European Payments Initiative. As a licensed entity, Payconiq International is subject to rigorous scrutiny much like other larger financial institutions, working on a continental scale to deliver large scale digital transformation projects for cross border payments over the last decade.
- Product development includes robust systems and standards implemented at every stage of the integration project.
- Data protection and security measures are key areas of focus.
- We deliver the compliance and technological expertise required to guide projects from inception to release.
This enables banks and other institutions to access the full potential of open banking while balancing their own risk and compliance priorities.
Building a financially competitive continent
For open banking to be truly achieved, regulators and market participants must collectively focus not only on what they need to do but why they do it, striking a balance between risk management and promoting innovation.
The continent already has a range of promising initiatives, incumbents and fintechs working together to build a more open future. In theory, the centralised planning and implementation of these rules could create a European market that can be more agile, innovative and connected than the future currently offered by US-born tech giants who, despite their size, have proven vulnerable to EU regulation violations.
Payconiq is working with the leaders in this field to deliver the capabilities, support and technology to support the next stage of evolution in the market and ultimately achieve the European dream of a truly innovative and open financial market that meets market participants’ needs with an eye to the future.
 Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF