Duty or freestyle? This question is posed by banks in the implementation of PSD2. The possibilities of open banking offer many opportunities for everyone but especially for regional banks. For example, a regional bank in Switzerland. Oliver Dlugosch gave us this contribution.
The PSD2 is now in force for a year and the next deadline is almost here: As of March 14, 2019, banks and payment services will have to provide third-party providers with a test environment (sandbox) and the associated technical documentation for the interface. The implementation of these requirements is in full swing and banks are striving for the perfect solution: The realization should cause as little internal effort as possible and still leave all possibilities open for future digitization projects – because there will be many options.
To what extent does one implement the PSD2?
The PSD2 offers a great opportunity for banks and fintechs and it will revolutionize banking from the ground up. The opening of core banking systems based on regulatory requirements forms the basis for creating a network with digital innovators. Against this background, every bank faces strategically important issues:
Should only the legal PSD2 requirements be implemented?
Should Open Banking offer elements such as open interfaces to data and analysis services? Do you even want to position yourself as a banking as a service provider? A business model that many “neo banks” pursue? With this approach, banks become the central provider for certain banking products or services for third-party companies.
To answer these questions, it is worth taking a look at what is possible in PSD2. In the PSD2 setup for banks, different levels of development are conceivable, depending on how much banks want to allow networking with fintechs and other financial service providers. One thing is clear: the stronger the degree of networking, the higher the end user benefits. Five possible scenarios are presented below, with the technical backbone being modern API platforms specialized for banking and PSD2:
The duty: PSD2-compatible XS2A
Solely Dedicated: The final Regulatory Technical Standards (RTS) for strong customer authentication dictate the provision of the test environment and technical documentation of the interface by 14 March 2019. From September 14, 2019, the productive operation will be realized. It is therefore sufficient if banks submit the PSD2 XS2A API within the legal requirements by 14 March. This minimum requirement is the so-called “compliance only” solution and can be realized, for example, with “PSD2-ready” by NDGIT within a short time.
The next level: multibanking
The first extension of pure compliance is the second level of connectivity, and means the provision of interfaces that allow multibanking: Bank customers are allowed cross-bank account aggregation and enjoy value-added account-based services (such as viewing financial information and triggering payments).
One step further: Enrichment
A second level enhancement is the expansion of the PSD2 API for partners such as Fintechs to enable high-quality services based on account analytics and other features. These include, for example, instant loans that can be completed online and paid out immediately.
Open Banking for open minds
The third level is open banking, the networking of banks and their digital partners. The prerequisite for this is the opening of the backend systems in order to offer data and analysis services via open interfaces (“open APIs”). Banks then act as “banking-as-a-service” providers providing Open APIs for customer or corporate data services, KYC processes, custody accounts, loans, and more. It is conceivable to use “whitelabel banking”, in which partners can use all digital processes of a financial product via APIs. Open Banking platforms enable PSD2 to be solved today while providing the foundation for a network of digital innovators.
The final goal: a separate ecosystem
The final level is the ecosystem, enabling financial institutions. The goal is to establish their own application stores to offer clients an individual network of fintech functions and partner products. The foundation for the ecosystem is an API platform optimized for banking use. With this, an efficient integration into existing banking systems is achievable and provides an SSO connection to each selected fintech.
A Swiss bank as a model
Depending on how the strategic decision of banks fails to implement PSD2, there is a wealth of opportunities for everyone. The market participants themselves are the ones who have to take the initiative. Especially Germany’s banks should not miss the chance to place themselves in the leading edge of a growth market. The construction of an ecosystem sounds in the ears of some banks in this country maybe even to the future, but there are already examples from practice.
Aargauer Hypothekenbank Lenzburg AG (HBL) has implemented Switzerland’s first comprehensive open banking framework based on NDGIT’s API platform. Fintechs and other partners can use standardized APIs to retrieve their data about HBL’s banking products and initiate customer-related processes in the bank. This example shows how all banks, and especially regional banks, will benefit from open banking: without neglecting their core business, these banks can outgrow their local clientele through cooperation with digital partners.
Also published on Medium.