Saturday, 13 January 2018

The brave new world of open banking: a bit more on PSD2

The 13th of January 2018 is an important date in advancing the framework of financial consumer protection. From today the Second Payment Services Directive (PSD2) became applicable in Member States.

As we already mentioned in previous posts, PSD2 is bringing many benefits for consumers by using the product regulation technique, a technique that is rarely applied on EU level as a consumer protection tool. The PSD2 abolishes charges for credit cards, regulates the price of cross-border payments, and bans firms to charge for fulfilling their information duties under the Directive. In addition, it also aims to protect consumers by transferring the risk and associated costs of a fraudulent payment or payment by mistake on the payment institution (see the summary here). These are without a doubt important milestones in advancing consumer protection, we must therefore hope that the rules will be enforced properly conferring the intended benefits on consumers.

There is another important aspect of the system of protection established by the PSD2 that we have not mentioned so far. PSD2 goes into the heart of a relationship of a customer and payment service provider enabling customers to decide on the fate of their data and enabling third parties to access data upon the customers' consent. PSD2 gives the possibility of opening up banking data for third party access, leaving the final choice in taking up the possibility to national regulatory authorities. Seeing the great potential for opening up the banking sector for competition, UK's Competition and Markets Authority instructed the 9 largest banks to open up their data, calling the initiative 'open banking.' This is said to be 'Britain's gigantic financial experiment' (see more here and here) that will be come to life gradually in the coming months. Banks must start allowing third parties, such as retailers, technology groups and rival lenders to access the accounts of customers who authorize it, accessing information such as bank statements and account balances. This is said to bring the biggest shake-up in the retail banking since the ATM has been invented 50 years ago (see here)! Sharing customer data via Open Application Programming Interface intends to increase innovation in the banking sector, opening up the market for fintech enterprises who are able to offer competitive prices and more innovative products to those provided by traditional banking.

Those UK customers that participate in the open banking project could benefit from bespoke budgeting advise and more convenient payment services. Several apps has already been launched that aggregate all of a persons financial information held by multiple banks, offering tailored products and services to customers. For example, Plum a savings account provider whose app analyses the customers income and spending habits calculating an affordable amount to save and then depositing this amount on a separate account. Or the online mortgage broker app Trussle that alerts consumers when they should remortgage to find a better deal taking into account information such as the value of the home, early exit fees and the cost of the new deal (see more here). In the future, there could also be apps that enable consumers to compare how much they spend for electricity bills with other people like them, or to receive real time offers from shops while they are shopping.

Sharing data however is not without risks. As mentioned above, PSD2 already incorporated a safety mechanism of transferring the risk of fraud and mistaken payments to payment service providers. The other risk that remains are those related to data protection, that are addressed by GDPR. Even though the supporting framework is in place, opening up access to personal, financial data is not an easy choice. There seem to be a lot more work to be done on informing consumers (this seem to be an area where information could be a useful consumer protection tool given the established framework of protection). Consumers should be at least made aware of what data will be shared, with potentially which providers and what are the limits of data sharing, or how will they be protected should something go wrong. Consumers should the be further educated in understanding the new offers, and in being able to compare the exciting opportunities offered by fintech firms.

Open banking and fintech therefore opens up a brave new world, it will be seen whether consumers are brave enough to participate in it.

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