# Insights

Oct 20, 2019

PSD2 Open up or disappear?

Reading time: four minutes

The early 2000s saw an explosive boom in new technologies. From music, to press, and even tourism – the internet has radically trans-formed whole swathes of our economy and obliged traditional stakeholders to rethink their business model in order to survive.

In Europe, the arrival of PayPal at the same time was the start of a new revolution in the banking and financial sector.

In 2009, rapid development of new payment services led the European Commission, the European Banking Authority, and their advisory bodies to issue the first directive (PSD1). We saw a wider range of payment services offered to consumers and a more stringent framework for new market players. The goal? Facilitate faster and simpler payments, while enhancing consumer protection.

As payments activity continued to change with the sharp rise in mobile and internet payments, the European Commission revised the first directive and agreed that it needed improvements and clarifications – all of which are essential to better protect customers and foster innovation.

As a result, the second Payment services directive (PSD2) was issued on 13th January 2018.

On Saturday 14th September the European Commission’s Directive came into effect, thus obliging banks and institutions based in the European Union to adopt open banking. For banks and financial stakeholders this means opening up their internal data to other stakeholders in the ecosystem – with consumer consent obviously. This change completely overhauls banking, financial, but also business ecosystems.

«Open» has become a buzz word in the financial services sector: open data, open APIs, open banking…the term open also refers to companies’ capacity to expose their services and data to the outside world, so that external partners, or even the competition, can use these services to provide added value to customers. This trend is been made possible thanks to technological changes facilitating APIs (Application Programming Interfaces).

Together, companies, which are interconnected via open APIs, form a new whole whose objective is to offer the best possible customer experience, by com-bining services offered by several companies.

Photo - container ship in the sea.

Open Banking is also becoming an underlying trend. It is driven by growing and changing customer requirements, direct competition from web giants, new services made possible with FinTechs, and the emergence of Neo-banks, as well as the burden of regulations that push traditional players to open up their data while at the same time complying with user protection rules.

As a result, the banking sector has been subject to one of its more significant transformations, which was initiated especially because of the rapid digita-lisation of the sector. Like the entertainment industry, media, and commerce, the internet has completely remodelled the banking and financial sector. In ad-dition to opening up their services, banks must build their own digital ecosystems. It’s the dawn of open banking.

This transformation leads banks to review their business models and move from developing generic end-to-end financial solutions to creating financial services tailored to their customers’ needs. Traditional, product-focused distribution must therefore evolve towards a positioning with high added-value, customer-centric services offering holistic financial vision and integrating services from other sectors. This can only happen by creating an ecosystem of open APIs that benefit all stakeholders.

Creating open ecosystems is an opportunity. Firstly, for banks who, even if they were hit hard by the financial crisis, continue to be considered trusted players, capable of ensuring their customers’ finan-cial security. Next, the client who, thanks to increased competition, benefits from improved services offered at a lower cost.

In conclusion, PSD2 makes open banking into a reality; it means we can create open and collaborative ecosystems.

Banks must now adapt their internal IT architecture and not limit themselves to the bare mi-nimum (i.e. payment initiation and account aggrega-tion) required by regulators. Banks must now start to open up their product portfolio and services to external stakeholders. This is what it takes for tra-ditional banks to survive the rise in neo-banks and competition from digital giants who are also seeking to roll out innovative financial services.

Guillaume Blot, Chief Digital and Innovation Officer – Senior Vice-President, Sopra Banking Software

Eric Horesnyi, General Manager – API & Integration, Axway