The UK's "Open Banking" initiative and the wider creation of "Third-Party Providers" (or "TTPs") under the EU's second Payment Services Directive both aim to be game-changers for retail and SME end-users of banking services.
The live date for both is 13th January 2018, albeit that the motivations of the authorities for promoting these solutions differ somewhat: in due course the technical and operational basis on which TTPs interact with banks will converge on the European Banking Authority's Regulatory Technical Standards for Strong Customer Authentication ("SCA") and for common and secure communication ("CSC").
The motivation for "Open Banking" on the part of the UK authorities is to break down the power of the big banks in retail and SME banking by compelling the nine largest UK banks - the so-called CMA9 - to support the set of Application Programming Interfaces ("APIs) that comprise the book of Open Banking standards: it is voluntary for other UK financial institutions to do so. The banks then to allow TTPs to draw information on customer accounts from them, and to relay customer payment orders to them.
The TTP's profile would be a technology-based new entrant, who will offer innovative and exciting propositions on top of the data they can receive from banks, and the payment orders they can send to banks.
"Open Banking" goes a little further in scope than the EU's second Payment Services Directive as there are APIs for locations of branches and ATMs, and for current account and overdraft conditions. The scope of the EU's directive is limited to account information and payment initiation.
The EU's motivation is to push forward with its concept of an integrated market for cards, mobile and internet payments and to counteract an issue with the development of the Single Euro Payments Area ("SEPA").
This issue is that the market model for SEPA foresaw the creation of Core&Basic payment services - cheap, easy-to-use, universally available - and that then market actors would of their own accord build innovative and exciting "overlay services" on top of the Core&Basic ones, known as "Value-Added Services".
This has largely not occurred, possibly due to the slow progress of SEPA adoption generally (although the adoption of the Core&Basic services should have been completed in early 2016), possibly due to the existence of annual upgrade cycles for the Core&Basic services - meaning that today's "Value-Added Service" feature might be incorporated into next year's "Core&Basic" version, eliminating competitive advantage and shortening payback period.
At any rate TTPs, in the eyes of the EU, are there to fill the Value-Added Services gap.
Either way - in the UK or the EU as a whole - the concept of what a TTP is likely to do is the same:
- collect account information from the customer's various banks (as long as those accounts are "payment accounts" as defined, which will not include credit card accounts, mortgages, loans, deposits);
- enable the customer to send payment orders to their banks through a single process and not by logging on to each bank's eBanking portal individually;
- monitor customer spending against targets and categories;
- optimise visibility of cash;
- optimise mobilisation of cash.
Whereas many retail customers will have just one main payments relationship, SMEs are more likely to find TTPs of value, as SMEs are often multi-banked and have payment accounts in several institutions.
The "single view" proposed by TTPs would be more useful to retail customers if it included credit card accounts, mortgages, loans, deposits, but of course even some banks individually cannot give this view for accounts in their own books (e.g. Cheltenham & Gloucester mortgages in the Lloyds eBanking system).
As ever with the projects like this, though, the initial offerings may be unexciting. Because the European Banking Authority's Regulatory Technical Standards are unlikely to come into force before Q3 2019 there is no technical and operational solution mandated on the UK institutions outside the CMA9 through which to comply with their obligation under Payment Services Directive 2 as from 13th January 2018. Thus all the UK's other "Account-Servicing Payment Service Providers" ("ASPSPs") are left in limbo for at least 18 months.
The FCA has stated that it expects that ASPSPs will adopt Open Banking from January 2018, but it has no power to enforce this, so in fact any technical and operational solution is potentially valid for the limbo period, leaving a gap in the Payments market structure for up to two years.
On top of this the new Third-Party Providers have to register with the Financial Conduct Authority, in some cases become FCA-authorised, and in all cases to have Professional Indemnity Insurance as a necessity for obtaining such registration/authorisation. The market for this PII would charitably be termed "emerging" and in the Lloyds market.
In the rest of the EU they do not even have the Open Banking APIs as an interim solution to work with. TTPs would have to register with and in some cases become authorised by the national counterpart of the FCA, and they have to have PII but do not enjoy the same quality of access to the Lloyds market as do the UK's TTPs.
For SMEs the TTP would offer an escape both from being locked in to a bank because of tight integration of the SME's IT systems with the bank's eBanking system: the APIs offer an integration methodology without adapting the SME's internal systems to the requirements of any one bank. This eases account switching, and adding/dropping banks, increasing flow to one bank at the expense of another without opening or closing accounts.
If an SME is multibanked, Open Banking relieves them of the burden of maintaining different security procedures and tokens for multiple eBanking systems.
The outcome would be similar to what much larger corporates have been able to achieve through SWIFT Corporate Access, service bureaux, IBOS and other multi-banking structures.
That's why "Open Banking", not just in the UK but in the EU as a whole thanks to PSD2, could indeed be a game-changer for the cash management of SMEs in the 2-3 year time horizon.
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