Try Macro Global’s
Understanding PSD3 Regulation in Modernising the Fintech and Payment Industry
Following the comprehension of PSD (Payment Services Directive) and PSD2 (Revised Payment Services Directive), the next step in the evolution of payment services is the development of PSD3 regulation. This will be accompanied by the implementation of PSR (Payments Services Regulation) and the Open Finance Framework. Notably, this transition will introduce the concept of Financial Services Information Providers (FSIP) and Financial Data Access (FIDA).
PSD3: Redefining the Payment Industry
The forthcoming PSD3 Directive represents more than a mere upgrade or improvement of its predecessor, PSD2. Instead, it will serve as a distinct and novel regulatory framework, drawing upon the foundations established by both PSD2 and the e-Money Directive.
PSD3 regulations function as the comprehensive framework outlining the principles governing licensing and the criteria for attaining the status of a licensed Payment Institution or an e-Money Institution (EMI). This regulation provides extensive details regarding the authorization and supervision of Payment Institutions (PIs) and Electronic Money Institutions (EMIs).
One of the key features of the PSD regulations is the impact it has had on cross-border transactions. Current cross-border transactions are often slow, expensive, and lack transparency. With PSD3, the EU aims to address these issues by enforcing rules that will ensure speedy, affordable and transparent cross border transactions.
This PSD3 proposal system is designed to enhance consumer protection, ensure secure payments, and ultimately foster innovation and competition within the fintech space. Most importantly, it also encompasses a few measures aimed at ensuring adequate financial inclusion.
To mitigate fragmentation throughout Europe, the commission made the decision to consolidate the remaining aspects into a Payment Services Regulation. This approach was chosen to circumvent the need for the transformation process and the subsequent interpretation into national law.
With Tavas from Macro Global, deploy the optimal combination of Open Banking APIs and technologies utilising the prevailing Open Banking ecosystem to accomplish the desired business outcomes.
New Regulatory Bodies of PSD3
Among many other changes, the Third Payment services Directives introduced new PSD3 regulatory bodies, each with their mandate and function. These include the Financial Instruments Service Provider (FISP), the Financial Innovation Databases (FIDA), and the Payment Systems Regulator (PSR).
FIDA: The Promoter of Digital Economy
Financial Innovation Databases (FIDA) is a legislative proposal, PSD3 regulatory body, made by the European Commission for a framework governing access to financial data. This framework will create explicit rights and obligations to regulate the sharing of consumer data in the financial industry beyond payment accounts. Once ratified by EU institutions, this framework would pave the way for Open Finance by encouraging innovation in the financial services industry and increasing competitiveness.
The European Commission’s goal with FIDA is to integrate Europe’s financial sector into the digital economy. Although the extent of the data covered by this proposal could potentially be expanded, it is a step in the right direction towards enabling the creation of new business cases and cutting-edge solutions for all value chain participants.
Payment Services Regulation: Strong Ally of PSD3 Regulations
The European commission’s Payment Services Regulation (PSR) is closely associated with PSD3 and has binding legal effect across all EU Member States without the necessity for implementation in national laws.
Recent guidelines from the European Commission state that PSR must offer clear guidance on the disclosure of terms and information needed to make payments.
By expanding IBAN verification, refining SCA rules, and strengthening fraud information transmission amongst PSPs, PSR in combination with ‘PSD3 regulations and compliance’ hope to increase user protection and consumer trust.
Open Banking competitiveness is enhanced by mandating dedicated data access interfaces for ASPSPs (Account Servicing Payment Service Providers), outlining data interface specifications, and introducing dashboards for consumers to monitor what data access privileges they have offered and to whom, and to withdraw access.
This significant PSD3 proposal increases the number of non-bank PSPs that can open a bank account for a Payment Institution/Electronic Money Institution (PI/EMI) and give them the option of direct involvement in all payment systems to improve access to data.
PSR also replaces unclear elements of PSD2, strengthens penalty provisions, and consolidates E-money legislation into PSD3 and PSR to improve enforcement and harmonise implementation.
The PSR is beneficial for PSPs as it unifies the legal framework within which they may conduct business throughout the entire EEA.
Tavas’ cloud-based, mature Open Banking compliance solution will help you enter new markets faster by exploiting the advantages of Open Banking.
Financial Infrastructure Security Protocol (FISP): Steering PSD3 Governance
The Financial Infrastructure Security Protocol (FISP) is an integral part of the revised Payment Services Regulations (PSD3) and serves as the backbone for operational security. FISP focuses on security guidelines, data handling principles, and operational practices, strengthening the payment service directives.
FISP harmonizes security measures across payment service providers, eliminating potential cyber threats and ensuring higher levels of financial data protection for consumers. This alignment eliminates potential cyber threats and increases consumer trust and confidence. Banks and FinTech companies are the soldiers on the frontline under PSD3 directive, and the implementation of FISP requires these institutions to enhance their security practices, increasing consumer trust and confidence.
The new regulatory bodies of PSD3 represent a landmark evolution in the regulation of payment services, enhancing the security of money transactions and instilling customer trust. Understanding the finer aspects of PSD3 regulations with frameworks in place, we can rest assured that our payment transactions are safe and secure.
Tavas, Macro Global’s Open Banking solution, builds confidence between banks and TPPs, helping them conform more closely to Open Banking regulations, while also ensuring that their customers’ identities are protected.
Highlights of EU-PSD3 Proposals
The EU Commission has proposed several highlights in its payments proposals, known as PSR1. These proposals aim to harmonize the payments market across all EU member states and improve the quality of open banking services. Some of the key highlights include:
Transformation of PSD2 to PSR1
The PSD2 revised regulations have been transformed into PSR1, aiming to broaden the path from open banking to inclusive banking, fostering data sharing and a more accessible and equitable financial system.
It offers enhanced user experience, security-reinforced data sharing, and a competitive landscape by streamlining data access. The transformation unwinds opportunities and challenges but promises a significant leap forward in the realm of financial services by redefining data sharing norms and bringing us closer to a more inclusive, user-focused world of finance.
Better APIs for Open Banking
Introduces new rules on API performance and functionality to ensure a higher quality of implementation across banks. It also requires the sharing of the account holder’s name with payment initiation service providers (PISPs) before initiating a payment.
Fraud Prevention Via IBAN and Name Matching
PSR1 extends the requirement for IBAN, and name checks to all forms of credit transfers, reducing cases of fraud or misdirected payments.
Integration of e-money and Payment Institutions
PSD3 merges the licensing and authorisation regimes of PSD2 and the E-Money Directive, creating a clearer and simpler framework for e-money and payment institutions.
Direct Access to Payment Infrastructure for Fintechs
PSR1 allows payment and e-money institutions to directly access payment settlement infrastructure, reducing their dependence on banking partners and promoting competition and innovation.
Simplified Authentication
The revised Payment Services Directives prohibit obstacles to open banking and requires authentication journeys to be as seamless as online banking. Users will no longer have to go through lengthy authentication processes or type in their own lengthy IBAN for payments.
Re-authorisation for Payment Firms
Payment and e-money institutions will need to seek re-authorisation within 24 months (about 2 years) of the new rules coming into force to ensure their fitness to operate and protect consumers and businesses.
Overall, PSD3 proposals aims to improve the payments market, enhance open banking services, and create a more efficient and secure payment ecosystem in the EU.
We, with Tavas, diligently observe and execute the modifications that impact the Open Banking Regulatory framework in a consistent manner, to assure our preparedness for the future and maintain a competitive edge among the industry counterparts.
PSD3: Modernising the Payment and Fintech Sector
PSD3 is a significant milestone in the fintech sector, offering transformative potential for the payment industry. It provides enhanced protection against fraud and sensitive data misuse, enhancing consumer confidence in electronic transactions.
PSD3 also promotes innovation by mandating open banking regulations and stimulating a healthy competitive environment. It also promotes standardization and interoperability across the banking sector, ensuring seamless and user-friendly experiences for consumers.
Additionally, PSD3 regulations pave the way for a more competitive landscape in the payment services market, with charges associated with electronic transactions expected to decline significantly.
Overall, PSD3 proposals play a pivotal role in redefining the fintech and payment industry by bolstering security, encouraging innovation, promoting standardization, and reducing costs, resulting in a modernized and more efficient payments landscape.
The Tavas, Open Banking Product Suite and Solutions, provide financial institutions with the ability to safeguard their brand, reputation, and business operations from fraud and financial risks. Additionally, these solutions enable the secure handling of payment service user data through the implementation of multi-factor authentication.
The Future: PSD3 Regulation
PSD3 regulations are projected to be an important catalyst in the fintech sector, which is undergoing a constant process of transition and modernization. The ramifications of PSD3’s integration with cutting-edge technology like AI (Artificial Intelligence), blockchain, and machine learning are vast.
The potential benefits of this groundbreaking law are definitely thrilling, but the route to full adoption may be hard and challenging. Although PSD3 regulations and compliance are currently in their early phases, it is anticipated that they will be finalised by mid-2025 and put into action by 2026.
Macro Global’s Open Banking solution, Tavas, equips the financial institution with the tools it needs to provide a seamless customer experience and gives it the agility to seize emerging opportunities as it prepares for the next generation of banking.
Exploring The Promising Future of PSD3 Regulation: What to Expect
The advances in technology have significantly transformed how individuals and businesses transact financially. Among these changes is the introduction of the PSD3 regulation that redefines the operations of the banking industry and payment services within the European Union. As a directive, the adoption of PSD3 will have far-reaching impacts on the banking sector, with changes set to spread over to other regions worldwide.
Understanding the PSD3 Regulations
The Payment Services Directive 3 (PSD3) is the third iteration of the regulations purposed at unifying and regulating electronic payments within the European Union member states. These directives trace their origin to the Payment Services Directive (PSD) established in 2007, followed by the revised version PSD2, which came into effect in 2018.
The PSD3 regulation seeks to provide an open banking framework that allows third-party providers (TPPs) to access banking data and continues the commitment of its predecessors, directing its focus towards extended consumer protections, enhanced security measures, and the promotion of innovations in the digital payment ecosystem.
Scope of PSD3 Implementation
Enhanced Emphasis on Open Banking
PSD3 could broaden the horizons of open banking by extending its provisions to sectors beyond banking. This could include insurance companies, mortgage lenders, and other investment firms, collectively amplifying the financial data pool and hence, allowing for more robust solutions.
Designed by Macro Global, Tavas epitomizes a revolution in open banking suites. With its versatile functionality, Tavas offers all-rounded digital banking solutions for businesses of all sizes, fostering seamless transactions and better financial management.
Streamlined Cross-border Payments
In a global economy, seamless cross-border transactions are essential. PSD3 could potentially revamp the present scenario by integrating faster, cheaper, and more secure cross-border payments.
Fraud Reduction
The potential of PSD3 to reduce fraud is substantial, considering the enhanced security measures and stringent regulations expected to come with it. PSD2 has already set a precedent with the introduction of Strong Customer Authentication (SCA), which is expected to escalate with PSD3. PSD3 will likely continue to impose stringent security provisions on transactions and data sharing while simultaneously encouraging financial service providers to adopt new anti-fraud technologies.
Furthermore, PSD3 could play a crucial role in promoting cybersecurity in digital payments. With customer consent required, banks are propelled to heighten their security measures to protect their customer data from external threats. This could potentially fuel the advancement of high-grade security features, leading to a more secure digital payment environment.
Using state-of-the-art encryption and a multifactor authentication process, your financial data is safely guarded with Tavas that priortises security at every juncture.
Data Control
PSD3 provides enhanced privacy and data protection features, giving customers more say over who can access their information and for what purposes. Data ownership is recognised as important and valuable in this directive, following the patterns of PSD2 and the General Data Protection Regulation (GDPR).
Tavas is an innovative, seamless, user-friendly open banking platform that utilises advanced analytics to provide effective and efficient real-time financial management tools.
Data Transparency
The success of PSD3 is intrinsically tied to data transparency. Customers, banks, and third-party providers will have access to more accurate and timely data, which can significantly enhance decision-making processes in the financial ecosystem. Transparency in data storage, usage, and sharing protocols will continue to build trust between different stakeholders and bolster the industry’s integrity.
Uniform Legislation Across the Globe
One of the primary objectives for PSD3 is to extend the principles of a more open, innovative, and secure payments ecosystem beyond Europe and create global uniformity in regulations. It can foster international co-operation and create a global payments ecosystem that can leverage the benefits of an open banking paradigm.
Innovation
PSD3 will likely foster a more competitive landscape that encourages innovation. By opening up the market to more FinTech and third-party providers and creating a fair-playing field, PSD3 can drive the development of groundbreaking financial services and products. For traditional banks, this will mean adapting to new technologies and innovating their services to maintain a competitive edge.
Collaboration with FinTech
Under PSD3, partnerships between banks and FinTech companies are expected to thrive due to a mutual interest in exploring the benefits of open banking. By working together, banks with well-established customer bases and trusted brands can combine forces with agile, innovative FinTech companies to create novel financial solutions that align with contemporary consumer requirements.
Increased Customer Service
Through PSD3’s emphasis on data transparency, enhanced security, and increased competition, a central benefactor is the customer and their service experience. With customers gaining more freedom to choose their service providers, banks and financial entities are compelled to improve their service to retain customers.
Tavas promises consistent updates, in line with industry advancements and customer demands. This commitment to staying abreast of the newest trends and adapting accordingly gives customers the confidence to entrust their banking needs with Tavas.
Unveiling the Challenges of PSD3 Implementation
Compatibility Issues
With the integration of Application Programming Interfaces (APIs), connecting the multifaceted programs and entities in the banking system poses a significant challenge. The inherent diversity in systems and infrastructures between banks necessitates the conversion of diverse data models to a unified format, which is a complicated task.
Implementation Cost
Implementation costs could be burdensome for banks as they need to modify their existing payment infrastructure to comply with PSD3. This might impede the realization of PSD3 benefits especially among smaller banks and newer fintech companies.
Navigating Complex Legal and Regulatory Issues
As PSD3 promotes greater participation from non-banking entities in the financial sector, operating within the stringent regulations of the financial industry can be a hurdle for many participants.
The complexity of legalities gets amplified when taking into account global operations, where multiple jurisdictions and their respective laws come into play. This requires entities to know both domestic and international regulations. Additionally, regulatory organisations must balance innovation with consumer and financial market protection.
End user Experience
The shift from a singular banking system to a more interconnected service raises substantial UI/UX challenges. Implementation of numerous APIs often leads to an increased margin of error in user interface, affecting the overall customer experience.
Market Dynamics
The implementation of PSD3 has led to significant changes in market customs. These changes have driven the banking industry towards a difficult path of adapting to new market behavior, competition, and business models. Institutions now have to deal with increased customer expectations, fiercer competition, and an uncertain and changing environment.
Filled with features ranging from splendid API connectivity, robust safeguarding measures and remarkable financial management, Tavas is a groundbreaking product proving to be the best open banking suite, compliant with latest PSD regulations, offering the financial technology solutions.
Future of PSD3 Legislation: The Long Road Ahead
The introduction of the PSD3 regulation to the financial ecosystem aims to make financial transactions efficient, reliable, and highly secure. Among other sweeping reforms, PSD3 could have remarkable implications for consumers, financial institutions, as well as FinTech companies, driving a new era for the payment industry.
By stressing more on digital security and further enabling competition, PSD3 could inspire consumer-centric innovations offering more control to customers over their data and creating robust multi-factor authentication systems to safeguard their financial transactions and personal information.
Furthermore, PSD3 is expected to empower consumers with more flexibility and transparency. It could make switching between banks easier and less costly, making the banking sector even more competitive. It may also introduce consumer-centric pricing models, thereby promoting fair pricing based on usage or consumption.
PSD3 could also enhance payments’ efficiency by incorporating instantaneous payment capability within its framework. This would significantly expedite cross-border transactions, reducing the waiting time typically associated with such transfers.
Thus, the journey towards full-scale PSD3 regulation implementation will be a remarkable milestone in the evolution of the financial services industry. By prudently addressing the prospective challenges, the PSD3 can potentially pave the way for a democratic, and inclusive financial services landscape. This responsive adaptation would be critical for businesses, governments, consumers, and society as a whole to thrive in an increasingly digitized, interlinked, and dynamic global economy.
Tavas plays a vital role in synthesizing complex banking operations and fostering a thriving ecosystem where customers can access a broad array of financial services. From secure payment initiation to a consolidated view of account information, Tavas provides all the benefits stipulated under PSD2. Its multi-tiered security framework helps protect sensitive customer data while promoting an open and transparent banking system.
Unlock New Business Possibilities with 40+ well-diversified Open Banking use cases
Tavas - Open Banking Product Suite and Solutions
Understanding Open Economy: Distinguishing it from Open Banking and Open Finance
One of the vital developments in the banking and finance industry is exposing customers financial data, in which financial institutions’ customers may share their data with their organizations of choice to effectively handle their financial assets. This shift, known as open banking or open finance, paves the way for a more freely trading open economy.
An open financial ecosystem is emerging from changes in customer expectations, technological advancements, and regulatory policies. To better serve their customer base, financial institutions, and other participants (such as fintech firms) in this ecosystem collaborate to provide a wide range of resources. This ecosystem is growing and diversifying, ranging from “open banking” and “open finance” to “open economy.”
What is an Open Economy?
By building on the principles of open banking and open finance, an open economy fosters unprecedented rates of digital collaboration. It merges all user data with financial data, giving businesses access to a wealth of current information that can be used to deliver customized products and services to consumers.
An open economy will radically alter how society functions; however, consumers must approve third parties to access their data. New infrastructural and technical advances, along with extensive legislation and consumer protections, will be needed to achieve a completely open economy.
Open economy reflects the obvious placement of individuals as the true owners of their data, the power for them to authorize the sharing of their financial data with any third party of their choice, and the enabling technology.
Data will be freed, innovation will speed up, and organizations of all types will have the ability to develop new business and income models if the open economy is effective.
Open Economy Outlook
It appears that by 2024, the number of people using open banking would have increased by about 50%, hitting around 132.2 million people worldwide. The explosive growth of open banking indicates well the future of open finance and an open economy. These innovations will transform every sector of the economy and alter how consumers, companies, and financial institutions use data.
How Open Economy differs from Open Banking and Open Finance?
Customers and businesses alike have gained advantages from the enhanced accessibility of the financial system that has resulted from the development and widespread implementation of open banking and open finance.
Together, open banking, open finance, and now open economy are redefining digital finance in revolutionary ways. These three initiatives are reshaping the future of consumer finance, consumer data, personalized service delivery, and more, causing widespread change across several sectors.
Though these concepts are interconnected among each other, they are not the same.
Let us explore the difference between Open Banking, Open Finance, and Open Economy
Open Banking | Open Finance | Open Economy |
|---|---|---|
| Open banking enables banks to share consumer data with third-party service providers via application programming interfaces (APIs) and a centralised dashboard for interrelated banking services. | Open finance differs from open banking in that it includes not only banking data but all financial data and transactions. | To promote a higher level of digital connectedness, an open economy builds on the principles of open banking and open finance. It will merge all user data with financial data, giving companies access to a wealth of added information that can be used to deliver personalised products and services. |
| Data is shared for Account Information, Payment Initiation | Data is shared across financial sectors such as Mortgages, Insurance, Pensions, Investment | Data is shared across different sectors such as E-commerce, Payroll, Healthcare, Utility, Gaming, etc. |
| The third-party organisations are granted authorization to access user account information via a protected back-end technological link and may afterwards use such information as stated. | This information can also be used by third-party organisations to conduct evaluations. | Before third-party organisations can utilise a user’s data, they still require the user’s consent. |
| Helps financial institutions in their efforts to enhance consumer interaction and new product development. | Banks may enhance and extend their present services by incorporating both financial and non-financial items to provide customers with more choice and personalisation. | Build a banking platform that provides customers with a seamless, unified, hyper-personalized, contextualised, accurate, and proactive banking experience. |
| Applications include Account aggregation, Subscription models, KYC (Know Your Customer), Anti-money Laundering, among others. | Applications such as PFM solutions, Embedded finance, Open pensions, among others. | Application extends to Tax authorities, E-commerce, healthcare, digital banks, etc. |
Role of Open Banking/PSD2 regulations in leveraging Open Economy
Open Banking and the adoption of PSD2 regulations have given a major boost in recent years to the idea of an open economy. These regulatory frameworks have paved the way for a more open and interconnected financial ecosystem, thereby promoting increased competition, improved innovation, and constructive cooperation between financial institutions and fintech firms.
Open Banking promotes customer-focused banking experience by making financial data more accessible to businesses and consumers while increasing the efficiency of the financial system and making transactions more affordable and accurate. Implementing PSD2 rules reinforces the underpinnings of an open economy.
Banks are obligated to allow authorised third-party providers access to customer account information and payment initiation services per Payment Services Directive 2. This not only benefits consumers by expanding their options, but it also promotes innovation by facilitating partnerships between established financial institutions and newer, more innovative fintech firms.
An open economy is greatly aided by Open Banking/PSD2 regulations by removing barriers to the free and secure exchange of financial data. These regulations increase competition among financial service providers and offer customers more agency by allowing for seamless integration between different service providers. They additionally motivate fintech companies to provide personalised products and services and ultimately lead us closer to a more inclusive and successful open economy.
For instance, establishment of financial services like cross-border payments, fraud detection, and risk evaluation could be made possible with the assistance of open banking/PSD2 regulations.
Implications of Open Economy for Consumers, FIs and Businesses
An open economy minimises barriers for the free flow of products, services, and funds across boundaries and thus has broad implications for consumers, financial institutions, and businesses.
An open economy, therefore, promotes international trade and investment at affordable terms. Now more than ever, consumers have the power to assess costs and quality across many markets to zero in on the greatest deals. Moreover, an open economy stimulates innovation as businesses try to suit the needs of customers all around the world.
The role of financial institutions in an open economy is equally significant. They make cross-border transactions easier, offer options for funding to businesses that plan to grow worldwide and provide a range of investment opportunities for people looking to diversify their investment portfolios internationally.
Financial institutions (FIs) have evolved their services to accommodate the needs of customers in an open economy by offering worldwide banking services, foreign exchange services, and investment products intended for international markets.
The open economy presents both challenges and prospects for businesses. Competition from foreign businesses entering domestic markets is one challenge they confront. Yet it can also be regarded as an opportunity for businesses to connect with more customers by tapping new markets besides their current ones. To keep up with the rest of the world and thrive in today’s global market, businesses must continually explore and upgrade.
Role of Fintech in Open Economy
The importance of financial technology, or Fintech, has grown, as businesses and consumers look for global integration and connectivity.
Utilisation of Application Programming Interfaces (APIs) is a significant factor in Fintech’s advancement in an open economy. APIs allow smooth communication between many platforms and systems.
Applications programming interfaces (APIs) are crucial to the success of Fintech because they allow for the safe transfer of information between banks, TPPs, and other parties involved. This enables improved cooperation and interoperability across different participants in the financial ecosystem.
The development of TPPs has further altered the way Fintech functions in an open economy. These third-party providers employ APIs to gain authorised access to consumer information from banks and other financial institutions. TPPs can provide cutting-edge services like account aggregation, payment initiation, and customised financial guidance in this way.
Additionally, the function of Fintech in an open economy goes beyond that of a traditional financial institution. It includes a broad spectrum of sectors, from fundraising to financing to investment management tools to digital currencies. The extensive adoption of such technologies has enabled protected, hassle-free cross-border payments.
By connecting with TPPs using APIs, banks and other financial institutions can increase both the scope and depth of their product lines. By doing so, FIs may speedily introduce cutting-edge offerings from the industry’s top vendors.
Instruction to Third-party Providers
Open ecosystems operate on the premise that customers have full control over all their data, both financial and otherwise. Financial institutions and fintech companies provide services “on behalf of” their customers.
Third-party access to financial data should adhere to the following fundamental principles:
- Customers’ data can only be accessed or shared after receiving their explicit authorization. Also, they ought to be offered a simple and reliable way to revoke it.
- The duration and frequency of the requested access to the customer’s data, and the stated purpose (function), must be disclosed to the customer as part of the permission procedure.
- The TPPs should give users the option to limit the scope, duration, and/or frequency of the data’s use by authorized recipients
- Strong customer authentication (SCA) must verify the identity of the customer giving consent. Each use case will have a different level of risk, which will influence how SCA is implemented. For example, SCA may be required every time a payment is initiated, but just once to report account balances.
- To avoid unauthorized access to data, TPPs must authenticate themselves to data providers (e.g., FIs) in a secure manner. For instance, PSD2 in Europe mandates that TPPs use an established electronic identification certificate (eIDAS) to verify their identities.
- Customer information must be kept private in the same way it always has been. This means that your communication route must be secure. To prevent the unwarranted disclosure of private customer data during transmission, third-party access should be granted only through secure (encrypted) methods, such as an API.
Strategies that Bank & FIs should Follow to Leverage Open Economy
Banks and financial institutions must welcome the concept of an open economy to stay competitive in the contemporary financial market. These businesses may expand their reach and better serve their customers by taking advantage of the benefits of the open economy.
Financial institutions and banks call for new strategies that are in accordance with the principles behind an open economy to endure this transformation. Fostering transparency, collaboration, and interoperability is vital for establishing an integrated system that suits the needs of every party involved.
By Collaborating with fintech companies and other non-traditional players in the financial industry, banks shall integrate third-party services and technologies into their existing framework to expand their customer base while enhancing their services
Adopting open APIs (Application Programming Interfaces) is also essential for promoting the exchange of data between participants in an open economic environment. This not only encourages innovation but also offers personalised service to each consumer.
Furthermore, financial institutions (FIs) should work to promote a setting that supports innovation and experimentation. Creating such a setting involves allowing employees the opportunity and resources to experiment with cutting-edge technologies and notions.
Financial institutions can establish themselves as market leaders in the open economy era by adopting these tactics. In today’s interconnected world, they can make use of modern technology, work together with third parties, and provide improved services to satisfy the varying demands of their customers.
Global Perspectives & Initiatives
While open banking and finance provide several potentials for FIs to give more value to their customers, they also increase competition from fintech companies and other startups to the open ecosystem.
Financial institutions in Europe are increasingly able to provide open payments to retailers and other companies. Financial institutions may facilitate the operations of fintech businesses by meeting their requirements for BaaS, therefore enabling fintech businesses to serve their customers.
The global initiatives regarding open economy range from those that are limited to financial services alone (European Union) to those that reach beyond finance into other areas (Australia). In Europe, banks are required to grant TPPs access to payment accounts, but TPPs are not permitted to grant banks access to any of the data they collect or store. Some other regions have open-door policies when it comes to data exchange.
Though, legislators in many nations are implementing a variety of initiatives that encourage and speed up the roll out of data sharing frameworks in the banking sector.
Open Economy Use Cases
Financial Services
Next-generation financial services can be powered by combining banking data with data from e-commerce businesses, payroll providers, healthcare institutions, energy companies, and so on in the digital arena.
Payroll data supports innovative financial products including automated investing, earned wage access (EWA), income-based loans, and savings programs.
Embedded Finance
One of the most important developments in the financial sector, embedded finance, will let brands and digital companies introduce embedded financial solutions to their customer base.
Remote Employment
Technology in the workplace has evolved to accommodate the growing trend of remote employment. They help multinational corporations with global payroll, taxation, compliance, and benefits administration.
Digital Bank
The debut of the digital bank is intended to appeal to youthful clients with its digital services and lifestyle platform. In three distinct applications, it markets hyper-customized monetary and non-monetary goods to children, teenagers, and adults. Especially, facilitates a unified banking environment for clients.
The ‘Open Economy’ is changing the ways businesses and customers interact for mutual advantages through the proliferation of open data, models, talent, and experiences.
Open Economy Regulations & Data Privacy
The proliferation of “open economy” initiatives is widespread. Some are market-driven, such as the U.S., while others are governed by regulations (such as the EU and the U.K.). The initiatives vary in scope: While some are limited to financial services only (in the EU), others reach well beyond banks.
Globally, regulators are working to encourage innovative ideas and healthy competition between traditional financial institutions and fintech startups. Regulations are being issued by an increasing number of nations that provide individuals with the right to decide who has access to their financial data and by extension, who benefits from it. These consumer rights are sometimes extended to other spheres of the economy.
Let us quickly go over the worldwide landscape of consumer data ownership, sharing, and protection regulations that are in effect.
European Union
Data Act
Empowers both consumers and businesses to define who can derive value from data and under what circumstances.
General Data Protection Regulation
A set of guidelines for how the personal information of European Union (EU) citizens should be collected, stored, and processed. It safeguards the data and offers greater authority to the EU citizens over their data.
United Kingdom
United Kingdom adheres to the GDPR guidelines of European union.
United States
California Consumer Privacy Act (CCPA)
Allows customers greater power over the personal data that companies collect about them.
California Privacy Rights (CPRA)
Includes additional consumer privacy safeguards which will go into effect in 2023.
Canada
The Consumer Privacy Protection Act
This piece of federal legislation requires businesses to adhere to new minimum privacy standards. Consumers would have more control over firms’ data collection and use and reinforce the penalties for businesses that disregard the new regulations.
Australia
CDR (Consumer Data Right) law
Governs how businesses must safeguard customer data and how they can access, use, and share it. The industries of telecom and energy will be the focus of the upcoming phases.
Brazil
General Data Protection Law (LGPD)
A comprehensive regulation that mandates that organizations implement sufficient safeguards to protect personal data and adhere to specific processing guidelines.
Top Concerns About Data Privacy
- Data must be kept confidential, and their data ought to be used exclusively for the stated reason.
- Ensure that the data is secure and will not be breached, mishandled, or leaked to unauthorized parties.
- Make it simple for consumers to provide and revoke their permission to access data.
- Offer interoperability i.e., the same experience for granting consent to the exchange of data among various suppliers.
Final Thoughts
Unlock the potential of your bank’s portfolio and business model with an open economy that boasts a diverse range of compelling use cases. Banking is just the beginning – take your business to the next level with the power to re-engineer and expand your offerings.
Access new market opportunities with Macro Global’s Tavas – a reliable and fully compliant cloud-based Open Banking (PSD2) solution.
Harness the power of Open Banking, which is the key foundation of open economy to propel your business forward and empower your bank to build a seamless and connected experience for your customers with MG’s Tavas.
With unparalleled flexibility, you can easily embrace the latest developments and position yourself as a leader in the new era of consumer-centric banking.
Unlock New Business Possibilities with 40+ well-diversified Open Banking use cases
Tavas - Open Banking Product Suite and Solutions
Open Banking API Strategies for Banks & Financial Institutions
The idea of “open banking” has been receiving a lot of attention recently and we are bound to an evolution in our interactions with banking and other financial services due to it. This paradigm shift is fuelled by application programming interfaces (APIs) rendered by banks.
Management of customers’ confidential data by banks is significant because of the UK’s “open banking” initiative and the EU’s implementation of the Payment Services Directive 2 (PSD2). Using the application programming interfaces (API), we can authorise certain applications or services to access our data. Hence, Open banking with standardised APIs would reduce a lot of barriers between diverse kinds of banking services.
For instance, it improves our lives as we opt to share our personal financial data with a mobile app that displays such data in a consolidated view or to perform payment initiation directly from a checking account through an online accounting package.
Both traditional banks and new “Fintechs” stand to benefit from these developments, since they present an opportunity to transform the business model that has defined banking for decades.
Open Banking
Open banking is a drive that enables third-party financial service providers to access consumers’ banking data. The basic objective of open banking is to provide consumers with more control over their financial information by allowing them to safely use alternative financial services that tap into banking infrastructure.
Much of this new ecosystem is supported by Web API technologies. Using an API is a necessary part of Open Banking in this setting, as it offers more options to banking consumers.
Reasons for Adopting an API Approach to Open Banking
Many financial institutions are motivated to adopt Open banking in response to the implementation of the European Union’s Second Directive on Payment Services (PSD2).
There are numerous solid reasons in favour of open banking and numerous tangible financial incentives for financial institutions to make the transition. Let us look at the top reasons that follow.
Adhering to Compliance
Compliance is the main driving force for institutions to adopt open banking practises. PSD2, also known as X2SA (Access to Account), is the greatest example of a broad law that requires banks to disclose customer data with third parties.
The US Treasury has proposed new financial data sharing legislation, contradicting the country’s traditional market-driven strategy. Other major jurisdictions are also heading in this direction.
Obviously, the goal of compliance is not to increase income, but rather to maintain a viable firm. Compliance increases profitability by preventing pointless fines and fees.
Enhanced Digital Agility
Being able to share data rapidly, safely, and effectively is one of open banking’s biggest challenges. Many financial institutions are rethinking their data architectures as a result, opting for an API-first, microservices-based strategy to make information more readily available. Therefore, open banking is both necessary and beneficial in fostering more digital agility.
Open banking improves security and transparency and makes it easier for banks to use their own data internally, such as for service customisation or frontend applications.
An enhanced digital infrastructure enables data to be utilised more effectively internally to enhance the customer experience, thus improving customer lifetime value.
Superior API Packages
Open banking makes it easy to create new API offerings that generate remarkable revenue. Banks can generate more direct income if they design and market new API products. For other banking services (such as specific business accounts), these premium APIs can be utilised as up-sells or cross-sells.
Improvement in Customer Satisfaction
With open banking, customers have unparalleled choice in selecting from a wide range of banking options.
Customers are less likely to look elsewhere for their banking needs if their present financial institution offers a wider range of financial service integrations, regardless of whether such integrations are the bank’s own or not.
Customers are less inclined to switch banks if they are satisfied. As a result, the lifetime value of a customer rises, which boosts profits eventually.
Collaboration Prospects
Banks can offer enhanced features, personalised assistance, or even research and development partnerships to third-party companies in return for non-monetary benefits like cross-branding or product functionality for the bank in exchange.
Banks can attract new consumers by working with the third-party financial services industry to develop distinctive value propositions and innovative marketing approaches.
Broad Customer Base
With open banking, banks now have an immense opportunity to introduce new financial products and services based on its integration and can serve customers of other banks, potentially generating much more revenue and a progressive customer base.
Banking Made Accessible through Fintech APIs
There is a massive quantity of information that banks collect, from timestamps to transaction IDs. This data prompted the Fintech to think about how it could be utilised for better banking. “Better” means more open, transparent, and less corrupt.
FinTech services are reshaping the banking industry and the global financial system by eliminating traditional approaches such as paper checks, physical donations, paper currency, and investment businesses.
Technology is crucial to financial service industry advancement and thus APIs help banks improve speed and cost compared to outdated systems.
Banks and other financial institutions must upgrade to modern technologies to thrive in the years to come. And London prevails as an epicentre for the global fintech sector owing to a substantial number of investments in the fintech sector over there.
The meteoric growth of FinTech firms and open financial data initiatives worldwide is largely attributable to Application Programming Interfaces (API). The decision to construct the banking platform with an ecosystem of third-party developers in mind due to the following reasons:
- A bank API facilitates a faster onboarding experience for the end users.
- Banks can acquire partners that provide niche FinTech services with optimised front-end user interfaces by using APIs.
- Their APIs can be easily integrated with crowdfunding platforms, payment-splitting apps, and more.
- This is especially useful for startups with innovative financial-oriented products that may lack the resources to manage funds or set up their own bank.
- To help FinTech businesses succeed, particularly those who are developing their own APIs, banks can share this information through partnerships and APIs.
Banks require well-designed, standardised APIs and self-serving adoption processes with documentation, sandboxes, simulated account structures, and more to gain developer users quickly. A successful banking API requires more partnerships and lower startup costs for FinTech businesses.
Getting the bank programmable is a win-win situation on all fronts
- Developers can experiment with banks’ authority and expertise to produce cutting-edge services and resolve compliance difficulties.
- Customers now have access to a whole new class of services that operate in tandem with their existing accounts. Open banking could reduce political corruption.
- By capitalising on partner resources, banks may generate new revenue and boost client satisfaction.
What Experiences Can Customers Have With Open Banking?
Breaking through the technological barrier and emphasising solutions rather than technology is one of open banking’s biggest challenges. Although the heart of open banking is APIs, which enable users to safely share financial data with platforms and apps, the typical customer is more interested in knowing how this will benefit them. Simple use cases that provide perspective for end users are crucial for bridging this gap.
Consumers can better comprehend open banking’s advantages by highlighting screen scraping’s limitations while offering a user-focused approach.
Open banking’s proponents must evangelise the technology by refining the message in several ways to successfully put it on the consumer agenda:
User Control
The focus of open banking should shift away from its technological aspects and towards how consumers are at its core, managing access to their accounts according to their own conditions. Open banking becomes more enticing by emphasising consumers’ sovereignty over their financial data and account access.
Promote Amazing Use Cases
Open banking unlocks the prospects of several banking providers for consumers. Open banking advocates may excite customers by showing real-life use cases and how they can profit from accessing and using their account data.
Reduce Security Concerns
Security problems must be addressed to build trust in open banking. By adopting high-grade API security procedures and clearly communicating the robust security protections in place, users may feel secure in the safety of their financial data.
These techniques can turn open banking into a consumer-centric movement that enables people to manage their finances.
Control Matters
A common set of questions that arise when discussing open banking with customers is who can access their accounts and who is ultimately liable if anything goes wrong.
Open banking is decentralised like the Internet and APIs, which raises fundamental issues. Consumers don’t know what they consented to or who gets their financial information without centralised control.
To solve this issue and build trust in open banking, consumers need tools to observe and manage their consented activities. Open banking empowers consumers by giving them control and visibility.
Without blindly trusting other parties, consumers should understand their role in their financial environment.
Furthermore, building an open banking marketplace would organise and make available all the solutions that make use of open banking APIs. Providers could promote their products and consumers could search for and consume them in one spot. The marketplace lets regulators evaluate, monitor, and certify new products.
Open banking can boost customer trust and create a trustworthy financial services environment by introducing signage and creating an open banking marketplace.
Best-in-class API Protection for Financial Institutions
The necessity for top-notch API security for banks has become critical with the rise of open banking, in which financial institutions exchange customer information with third-party providers. To prevent cyber threats and data breaches, financial institutions must implement secure API systems.
Multi-layer Protection
Multi-layered security protections against hacking and data breaches are an integral part of any high-quality API security solution for financial institutions. API security relies heavily on authentication and authorisation.
Banks must authenticate and authorise API users before allowing access. Multi-factor authentication does this by demanding users validate their identities in more than one way. These ways can include providing additional passwords, biometrics, or tokens.
Robust Encryption Mechanisms
Banks should use robust encryption mechanisms to secure data at rest and in flight. Given this, even if an outsider intercepts the data, they will not be able to decode it or use it to their advantage.
Constant Monitoring
High-grade API security for financial institutions also involves constant monitoring and the discovery of threats. Strong monitoring systems should be in place at banks to immediately spot any unusual or fraudulent behaviour. To this end, advanced analytics and machine learning algorithms can look for obvious indications of a security attack.
To proactively resolve any vulnerabilities in their API systems, banks should not only monitor, but also undertake frequent vulnerability assessments and penetration testing.
Access control & Privilege Management
Further, financial institutions should adopt rigorous access controls and privilege management to ensure that only authorised people have access to personal data. Depending on one’s position and responsibilities inside an organisation, one may grant varying degrees of access. There will be less opportunity for theft or fraud with consumer data if banks follow the concept of least privilege.
Keep Tabs on Updates and Patches
Finally, banks should make maintaining their API systems with the latest updates and patches a top priority. This includes upgrading software on a regular basis and implementing security patches as soon as they are issued by vendors. If banks don’t keep up with upgrades, they risk having their application programming interfaces (APIs) hacked.
Regulatory Compliance Considerations
Data privacy and protection is an important aspect of regulatory compliance related to open banking API. Since APIs allow banks and third-party providers to exchange consumer information, keeping that information safe and in compliance with privacy laws is more important.
Financial institutions and their contracted service providers must take extreme precautions to guard against hacking, data breaches, and other forms of cybercrime. To further ensure consumer privacy and secure the necessary permission for data sharing, they must adhere to legislation such as the General Data Protection Regulation (GDPR).
Here are a few of the most frequent regulatory requirements that financial sector providers may encounter.
Basel II
Basel II is a set of international regulations that mandates the assessment and reduction of the operational risk losses of financial data by financial institutions. It specifically addresses issues with inadequate data security and system failures brought on by incorrect configuration or low expectations for system requirements. This makes it a useful reference for any system that has to start working with financial data.
PSD2
PSD2 is the European Union’s updated Payment Services Directive, written by the European Commission to standardise the industry across the European Union and the European Economic Area.
The regulations are meant to safeguard consumers and lay out clear parameters for how payment processors and banks should operate.
URSIT
A US government standard, the FFIEC Uniform Rating System for Information Technology (URSIT) evaluates an organization’s Auditing, Management, Development, Acquisition, Support, and Delivery procedures.
As a framework for establishing a procedure to detect security issues, URSIT is an invaluable resource.
The Gramm-Leach-Blilely Act
It is a federal law in the United States that mandates the protection of customers’ financial and personal data. The Federal Trade Commission’s Data Safeguards Rule, which mandates a comprehensive evaluation of a company’s security measures, has its origins in this law.
PCI-DSS
PCI-DSS is a regulatory standard that mandates vulnerability scanning and source code review to guarantee that payment card industry data and procedures meet the stringent security protocols required by providers and payment providers.
Many businesses operating online, especially those whose services include handling customer payments, consider PCI-DSS mandatory.
Any API that plans to accept card payments should be highly familiar with PCI-DSS because of the stringent standards it sets.
Sarbanes-Oxley
It mandates a reporting structure for internal controls to ensure that sensitive financial information is monitored and protected. It requires a thorough assessment of IT assets, software, and solutions for their resilience against data breaches and exposures and involves severe audit mechanisms for internal controls.
This is just a portion of the most prevalent and high-level regulatory standards. Regulations can be stiffer in certain parts of the world, and there can be even more noticeable differences amongst segments of an industry.
Yet, having a strong knowledge of these underlying frameworks for regulation could potentially guide in learning about open banking.
Tavas- Open Banking Product Suite
Macro Global’s Tavas is a comprehensive Open Banking solution that aims to revolutionize digital payments while ensuring compliance with the PSD2 regulations, including the UK Open Banking Specification, which allows banks to be exempt from contingency mechanisms for their dedicated API interface.
This open banking solution is highly secure and safe, utilizing a cloud-based SaaS platform to enable secure engagement with third-party providers.
With cutting-edge technology, including state-of-the-art Open Banking APIs, Tavas offers services such as Account Information, Payment Initiation, and Confirmation of Funds. And Tavas provides customizable Open APIs, allowing banks to manage their business processes effectively.
Additionally, their web-based administration portal provides valuable insights and management capabilities for TPP (third party providers) Onboarding, Transaction Status, and Consent management.
Tavas also offers a robust data flow and enhanced security features for the deployment of open APIs. With a focus on customer-centricity, it offers a range of compelling use cases that go beyond monetization, allowing banks to transform their portfolio and business model.
Remarkable & Competitive Features of Tavas
- Establishes trust with banks and TPPs (third party providers)
- Ensures compliance with Open Banking (PSD2) regulations
- Provides secure and strong customer authentication
- Customizable API Framework
- Monitors and implements changes in the regulatory environment
- Offers safe and intuitive end-user experience
- Builds trust and loyalty in payment services
- Provides a self-service developer portal with a sandbox environment for testing and integration
- Offers a suite of pre-built APIs ready for implementation
- Secured against database breaches, DDoS attacks, and man-in-the-middle attacks
As Open Banking continues to redefine the financial services landscape, Macro Global’s Tavas remains at the forefront of empowering financial institutions with its innovative API strategies to stay agile, competitive, and customer centric.
Tavas is a trusted ally for banking institutions looking to thrive in the digital age and unlock the full potential of Open Banking.
Final Thoughts
Banks may stay competitive in the face of a trend towards open banking practises with the support of an efficient API strategy. Since banks are using open banking APIs, they must provide customers with safe and reliable experiences. Customers’ personal data must be kept secure while meeting all applicable regulations.
Consumers benefit from the options provided by market-driven strategies, which also foster innovation and healthy competition. However, banks and third-party providers benefit from the transparency and efficiency provided by standardised frameworks.
Thus, financial institutions and banks who want to embrace open banking must have a well-executed API strategy. As the landscape of open banking continues to transform, it will be ever more vital for financial institutions to monitor developments across the sector and adjust their API strategy accordingly if they hope to maintain a competitive edge.
Variable Recurring Payments (VRPs) & Sweeping in Open Banking: Everything We Need to Know
VRPs (Variable Recurring Payments) are the most significant improvement in open banking to date. VRP addresses one of the industry’s most pressing issues: the requirement for consent via Strong Customer Authentication (SCA) for every transaction. VRP effectively authorised authentication to a third-party provider (TPPs), which then enabled trusted beneficiaries to pay with a single click.
VRPs will be easier and faster to set up than existing payment methods (Direct Debit, CPA), allowing consumers to manage payments more easily and integrating payments into a broader range of customer journeys.
As a result, VRPs are on track to become yet another example of the growing trend of “embedded finance,” as well as the overall transformation of open banking into open finance.
VRP has so far only been mandated for Sweeping use cases, which are transactions between two accounts with the same name. Notably, in developing VRP for the Sweeping use case, banks have built the infrastructure needed to support first-party-to-third-party transactions.
Customers will be able to use VRP for anything from subscriptions to in-app payments, as well as general e-commerce. Card-on-file will be replaced by account-on-file. Direct debits that are outdated and have a problematic operating interface may be phased out.
How do VRPs function?
Variable Recurring Payments require these three parameters to create a long-life consent token.
1. Maximum number of transactions in each period (for example, a month),
2.Maximum value of any single transaction,
3.Total aggregate value of all transactions in that period
For example, if your maximum transaction value of any single transaction is GBP300 and assume it never exceeds GBP300 per transaction. If you make such transactions 5 times, the total amount would be GBP1500 which is the maximum number of transactions and total aggregate value for the month. And if transactions stay within these parameters, SCA is not needed.
How do the customers receive help from VRP?
VRP enables faster and more secure payments. Moreover, customers will never be asked to update their credit or debit card information again. Bank accounts do not expire, while credit cards do. VRPs also provide customers with greater convenience, control, and security. While open payments are still in their early stage, there is strong adoption and growth. The benefits offered by VRP supplies will only speed up this process.
What does VRP mean for retailers?
VRP has massive benefits for merchants, including real-time settlements, lower costs, the getting rid of card fraud, lower customer churn, and no chargebacks.
VRP enables the opportunity to monetise Open Banking
VRP is the first opportunity for banks to monetize their open banking investment and contribute to the ecosystem’s balance. This has a hugely positive effect.
Open banking eases a handshake between banks (ASPSPs (Account Servicing Payment Service Provider)) and TPPs. As a result, these industry players must continue to collaborate on initiatives that expand the functionality set of open banking and the opportunities it provides.
VRP is one such collaboration model, and it stands for a significant opportunity to bring a fairer distribution of value across the ecosystem. This new collaboration between FinTech and banks will level the playing field as we collaborate to fulfil the full promise of real-time payments everywhere.
VRP works by securely connecting authorised PISPs (Payment Initiation Service Providers) to customers’ bank accounts, allowing them to make payments on their behalf. VRPs supply several advantages over Direct Debit and card CPA to both small businesses making payments and receiving payments.
VRP and Sweeping
Sweeping is the automatic transfer of funds between a customer’s accounts, such as transferring excess funds to another savings account or using them to repay a loan or overdraft account. VRPs are an innovative method of making ongoing payments.
The CMA9 will first make these VRP APIs (Application Programming Interfaces) available for “sweeping.” This is the transfer of funds from one PSU (payment service users) account to another. This can be used to automate a fixed amount to be transferred to a savings or investment account each month, or to sweep funds between current accounts to allow a customer to receive help from new account features, rates, or fees without switching current accounts.
One of the core priorities of the open banking agenda is user experience, and both regulators and industry will be monitoring the situation as the use of VRPs for sweeping are started rolling out in the coming months.
Real-world business advantages of VRPs for sweeping
The OBIE found potential benefits for both consumers and SMEs by combining VRPs and sweeping. These are some examples:
Saving money
You should be aware that, £100 billion is locked up in the UK’s business current accounts, earning little interest. However, while many businesses have a lot of cash, they do not have the time or interest to do anything with it.
A mandate can be set with a savings company to oversee a business’s current account. When the balance exceeds a certain threshold, the money could be transferred to a business savings account. Money could be swept back every time a balance falls below a certain threshold.
Overdraft protection
Sweeping has the potential to create a type of unbundled overdraft to increase competition in the business’s current account market.
International payment cost savings
According to a 2016 report, banks generate approximately £4 billion in excess profit when small businesses do not make cross-border payments. Sweeping VRPs could be used to remove the friction from using an alternative payment company or foreign exchange business.
Manage tax efficiently
As HMRC incorporates Open banking enables technology to support real-time secure payments. With VRP and sweeping, SMEs can manage their taxes well and make payments automatically without any fail once the invoice is generated or sent to SMEs.
New Subscription Economy Options
The subscription economy is expanding, with many SMEs taking part. VRPs offer a payment system that incorporates the low cost of Direct Debit with the speed and flexibility of cards, potentially creating a strong alternative in this growing market.
VRPs and the OBIE Roadmap
If you think about the next steps for VRPs, you should consider the Open Banking Implementation Entity’s (OBIE) Roadmap, which was developed in collaboration with the CMA that supplies a framework for Open Banking implementation. This Open Banking roadmap outlines several measures, including the development of technical standards for VRPs that are compliant with PSD2 (Payment Service Directive 2), the UK Payment Services Regulations 2017, and the GDPR.
Even though OBIE developed technical standards for VRPs, the CMA9 banks are not mandated to implement VRPs for all use cases. But CMA has ordered the CMA9 to implement VRPs as the mechanism for implementing sweeping. The use and implementation of the VRP standards are optional and at the discretion of the CMA9 firms for use cases unrelated to sweeping.
The CMA had originally planned to implement VRPs for sweeping by January 31, 2022. However, in response to OBIE recommendations, the CMA has allowed the CMA9 to extend the deadline. TPPs must then complete testing of the VRP standard in a live, controlled environment by July 2022, “so the firms are ready to advance general availability of the standard.”
Potential Use cases of VRP and Sweeping
Sweeping is one of the potential use cases for VRPs, which could be applied to a wide range of recurring payments and as an alternative to traditional fixed-period direct debit or card-on-file payments.
The OBIE’s Proposition Paper, published in November 2020, describes several use cases for VRPs, including:
a) Automated payments for electricity bills.
b) Linking a bank account to a social networking site app for in-app payment authentication.
c) Setting a six-month payment limit for a new subscription.
d) Automated payments for ride-hailing fees.
e) One-time payment setup for an online marketplace’s one-click payments.
f) Using a third-party smart saving app to transfer money from a bank account to a savings account on a flexible/variable basis.
g) Utilising a third-party service that supervises bank accounts and retains a threshold balance or assisting in avoiding overdraft fees by transferring funds between accounts as needed.
h) Obtaining short-term credit to avoid overdraft fees, then automating credit repayments to reduce overdraft charges and borrowing costs.
Concluding thoughts
Our analysis clearly showed that there is an appetite for VRP technology, and SMEs are eager to take advantage of this capability. VRPs help SMEs to mitigate overdue payments, and remove challenges, and pain points associated with other payment methods such as Direct Debit and CPA. The key to adoption will be in ensuring time and cost barriers are overcome to ensure SMEs get to the start line.
Macro Global’s Open Banking (PSD2) solution, Tavas enables banks to create a connected experience while also allowing them to adapt to emerging opportunities to position themselves in the new era of consumer-centric banking. Tavas – Open Banking Product Suite & Solutions instils innovation in banks by redefining account and payment aggregation via a game-changing Open Banking API Framework that addresses all compliance requirements while providing a best-in-class user experience.
Discover more about our best-in-class Open Banking solution.
Enhancing CX in Financial Services via Open Banking
Open banking enables customer financial data, including transactions and payment history, available to financial service providers and third-party payment services. While this approach focuses on improving new financial services and products and ensuring transaction security, adoption is heavily reliant on a positive customer experience.
Open Banking Implementation Entity (OBIE) established the Customer Experience Guidelines which are intended to make it easier and safer for people to use products and services that support Open Banking. It combines the regulatory requirements and customer insights to create the Standard for TPPs and ASPSPs.
Open Banking regulation has made a significant revolution in the payment services industry, not only from a compliance perspective but also bringing a better experience to the customers. It mandates that banks develop APIs for digital banking transactions that can be used by value-added revolutionary service providers to inculcate competition and innovation among financial institutions across the industry. Open Banking also aims to prevent customer lock-in by standardising account switching capabilities and simplifying payment processing.
Customers are now exposed to a new business model where they must consent for their financial information to be shared with third parties. They can only consent if they feel well-informed, safe, and in charge throughout the entire process.
Open Banking builds healthy competition in delivering a better customer experience
The opportunity to create better customer experiences has been made possible by open banking. As per recent research, well-established or traditional banks are falling short in the eyes of customers when it comes to customer experience. However, smaller, or new banks are excelled in offering a better customer experience.
Customers laud the more niche digital banks for their user-friendly online services, appealing products, and superior customer service in general. But the gap is not caused by products or attractive interest rates. Existing banks are capable of matching both.
Customer service and digital transformation are more highly linked. With the rise of newer technologies such as mobile, big data, and enhanced real-time analytics, businesses can now create new, personalised offerings for their customers and prospects. Achieving customer expectations today includes intuitive user interfaces that allow them to accomplish their desired tasks quickly and easily across multiple devices, as well as customized value-added services based on their specific needs, backed by data and advanced analytics that offer useful insights and recommendations.
They are more customer-centric and provide a more consistent, convincing experience for the end-user thanks to the resulting agility and decreased costs of change that allow them to move quickly from idea to reality.
Traditional banks may be compelled, in the face of increasing competition, to concentrate on enhanced user interface design, giving current services slick interfaces. Customer experience, though, goes beyond the surface.
Behind appealing interfaces, a truly connected enterprise beats at the core of an intriguing customer experience. A customer journey is made or broken by the seamless integration data model and the aligned business process. Customers who self-serve and a hyper-enabled customer support function are simultaneously created by giving internal staff and customers access to the information they need when they need it.
The reliance on quick and unrestricted access to data will become incredibly valuable for traditional banks that are aiming to establish and defend a competitive advantage. The commoditization and implementation of advanced analytics have already spawned a new generation of enterprises known as FinTech, which leverage open APIs and standards while focusing on customer-centric innovation for new financial products and services.
Bringing Business & Technology together
With the evolution of FinTech, the effective implementation of new generation intelligent platforms improves, and the appetite for the predictive analytical techniques of the data will grow.
To deliver a superior customer experience, banks should consider all the possible architectural aspects such as processes, services, data, and technology. Customers will appreciate simple, fast, and sophisticated core services for multiple channels and user-friendly interfaces. All these actions necessitate the meticulous orchestration of architectural changes and fundamental architectural elements. This is where enterprise architecture comes into play. By connecting these touchpoints to business process models and information technology systems, the experience is optimally orchestrated and transformed to deliver targeted outcomes for customers – and results for the bank.
Open Banking fosters the banks to redesign their products and services for improved customer experience, improved processes, and faster time to market to avoid being relegated to “lowest common denominator” account servicing roles.
Simultaneously, banks can broaden their reach through fintech challengers by providing innovative API services that drive adoption in the fintech ecosystem. Adoption in the fintech ecosystem, of course, provides incumbent banks with sources of innovation through acquisition, fostering long-term growth and profitability.
Cloud Migration
Traditional banks are finally embracing the cloud to accelerate their digital transformation goals. Cloud migration is neither practical nor cost-effective. In contrast, the institutional agility and flexibility gained by embracing cloud infrastructure and services justify the required investments. Existing banks can provide new services, increased capacity, and ongoing modernization in ways that earlier attempts focused on delivering on-premises solutions could not.
Macro Global has achieved “Gold Partner” status with Microsoft. Most of our products are now being scaled up to Cloud Platforms, and customers will soon be able to upgrade to “Cloud Only” or “On-premises with Cloud Adoption” to address BCP and cost constraints. The cloud option allows our customers to pay a single set of fees for the entire solution, including hardware, operating system, Development Framework, and product, all of which are managed by us.
It’s simple to manage and scale up with the push of a button, and it’s accessible from anywhere on any device.
Accelerate IT modernisation and digitisation efforts
Open Banking emphasises transparency, security, and access, which provides banks with an opportunity to fast-track their digitization and IT infrastructure modernization efforts. Banks can compete as technology innovators by leveraging their vast resources and massive amounts of available data, using powerful advanced and predictive analytical tools to extract valuable insights. These insights can be used to broaden the service portfolio, gain more customers, increase revenue, and improve internal efficiency. Banks should focus on continuous innovation by improving technology infrastructure, introducing new processes, and optimising current processes to enable seamless customer journeys.
Macro Global’s Open Banking (PSD2) solution, Tavas enables banks to create a connected experience while also allowing them to adapt to emerging opportunities to position themselves in the new era of consumer-centric banking. Tavas – Open Banking Product Suite & Solutions instils innovation in banks by redefining account and payment aggregation via a game-changing Open Banking API Framework that addresses all compliance requirements while providing a best-in-class user experience.
Discover more about our best-in-class Open Banking solution.
Security & Privacy in Open Banking: Risks, Challenges & Solutions
Open banking is crucial in developing and delivering new revenue-generating services that today’s customers require. Financial institutions (FIs) around the world are increasingly making Application Programming Interfaces (APIs) available to a growing number of Fintechs and other third-party technology providers, such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), as part of open banking initiatives.
The primary concerns for anyone involved in the open banking environment are financial privacy and the security of consumers’ finances. According to research, 48 per cent of consumers had negative opinions about open banking due to data and cybersecurity concerns. Malicious third-party apps could gain access to a customer’s account, data breaches could occur, and fraud, hacking, and insider threats are all possibilities.
To secure their businesses, protect their customer relationships, and consumer privacy, financial institutions should indeed re-evaluate their data privacy and security practices in tandem with their open banking initiatives.
In this article, we deep dive into key security and privacy challenges around open banking and the proactive steps that every financial institution should take to intensify and strengthen its open banking initiatives.
1. Adherence to Regulations and Standards
It is essential that each participant in the FI ecosystem follows the same set of guidelines and adopts a standard that can be relied upon by all. Access to open banking APIs is only available to apps that have undergone an independent audit and proven that their processes and security controls meet the FCA’s standards.
They must do this regularly after the initial audit to maintain authorization. Simultaneously, open banking regulations, such as the European PSD2, and local and regional protection laws, such as the GDPR, establish equal rules for all and enforce a high level of security.
Adherence to compliance and regulations not only helps them provide security but also frees them up to focus on innovation can be aided by an industry-wide proactive defence strategy based on the evaluation of FIs (including banks, Fintechs, regulators, and government agencies), security controls, and compiled threat intelligence data.
2. Giving Control to the Customers
Customers should be fully conscious of how their data is being used, how they can handle it, how it is being stored, and how the business is regulated, according to open banking security. The rules have already been established. Financial services, such as FinTech apps, have recently become more proactive in informing customers about their data and encouraging them to interact with it. Promoting data accessibility and transparency builds trust and ensures users have control.
3. Know Your Customer
One of the most difficult challenges that open banking faces are detecting suspicious activities in transaction monitoring that indicate cybercrimes or money laundering. KYC (Know Your Customer) is a process that every bank must go through with every customer, both initially and regularly, to identify and verify their identity.
Banks must understand their platform consumers and the partners they are connecting with. This includes their identity, as well as more detailed information about the endpoint devices from which they’re connecting (to ensure they’re not vulnerable to hacking), geographical location, and other factors. All of this is required to safeguard sensitive data, the user journey, and comply with financial sector regulations. The first step in preventing financial crime and money laundering is rigorous customer identification.
4. Evolution of Advanced Authentication and Authorization methods
For the protection of APIs, content filtering is crucial. Financial institutions require a comprehensive vulnerability management strategy that considers people, processes, and technology. As well as frequent scanning measures to identify real-time or potential threats, risks and the ability to address them in near real-time.
Access control is the main justification for using API gateways, though. With the advent of biometrics technology and multi-factor authentication (MFA), there is a significant evolution in recent times. In addition to a strong password, which is also crucial, multifactor authentication mandates an additional step for users to log into their accounts. These may involve asking the account holder one more question, sending a text message to their phone, or using a biometric scan like a fingerprint to unlock the account. According to studies, MFAs successfully thwart 99.9% of all potential hacks.
Additionally, open banking made APIs more secure. Standards like OAuth 2.0 or OpenID Connect must be used to secure API access, and it is frequently necessary to maintain support for SAML for access control on existing solutions. Implementing Single Sign-on (SSO) and Identity and Access Management (IAM) add additional security layers.
An authentication system that combines artificial intelligence (AI) and human intelligence can also assist in addressing the issue of managing multiple passwords.
Furthermore, technological solutions such as biometrics tokens (OTP) can be beneficial. It can help banks improve security and provide a better customer experience by utilising more effective processes and workflows.
5. Strong Data Encryption Techniques
Encryption is the stepping stone in ensuring data security. Data sharing in Financial Institutions should be permission-based or risk-based, with proper audit trails based on regulations and risk management standards. FIs can improve their security while running their operations more smoothly by using identity and authorization validation, Know-Your-Customer (KYC) capabilities, and fraud detection techniques.
While API management, security, and integration are the unsung heroes of open API implementations, speed and compatibility with bank infrastructure are critical to success. Banks can simplify processes for their customers and gain more control over security by implementing risk-based and permission-based security. Furthermore, it will assist banks in streamlining their security infrastructure and making it more efficient and customer-centric.
6. IT Security Governance
Cybersecurity is more than just robust. It constantly looks for threats, weak spots, scans for vulnerabilities, and flags problems before they even arise. This process is improved by information sharing between businesses and cooperative intelligence within the banking environment.
Increasing demands in Web Application Firewalls such as user experience and service networking, are causing traditional web applications to die. APIs are typically built as RESTful web services and use data formats that differ from those used by traditional web applications. As a result, the basic interaction paradigm between client and server has changed also protecting these APIs necessitates the development of new technologies.
FIs can increase the security of their operations by taking stringent measures like implementing strong customer authentication (SCA) through multifactor authentication (MFA), implementing risk-based MFA throughout the entire infrastructure, and enabling minimal role-based access.
7. Establish a secure digital platform
While implementing open banking, it is required to have a secure digital platform as banks must transfer and consume certain data with third-party providers. A secure digital banking platform serves as a central location for connecting, storing, working with, and securing your open banking data.
All of this is made possible by microservices such as security solutions, which can be easily built on the digital platform and are already integrated into the Macro Global Digital Banking Suite, Calculus.
8. AI & ML for Behaviour analysis
Artificial Intelligence has greater potential in open banking. Based on more data, it learns and creates a more realistic assessment of the customers and their transactions. Banks can forecast customer behaviour which helps the banks to serve best to their customers. It can also help them spot odd or suspicious activity.
Banks can assess and manage the behaviour of their third-party providers (TPPs) as well as capture the patterns with the aid of AI and ML-driven solutions. Real-time verification is necessary for real-time payments. Therefore, having access to advanced analytics, AI, and ML learning tools can aid FIs in identifying fraudulent and cybercriminal activity. It is not surprising that FIs are adopting new technologies more quickly than ever as it gives them the chance to improve their ability to adapt to any future changes. For instance, natural language processing (NLP) can be used to capture and process regulations, which can then be applied to gain a sizable competitive advantage. If an incident occurs, banks can track the transactions which is critical for risk and compliance.
ML can support the detection of abnormal behaviours in fraud and system breaches. Commencing with a sample set of data, the machine is trained to spot fraudulent activity, identify the fraud, and eventually predict and stop threats.
Both FIs and consumers have a lot to gain from open banking and to profit from it, FIs must maintain consumer confidence and safeguard private information.
9. Dismantling rigid organisational structures
Another significant challenge is less technical and more organisational, namely many companies’ SILO thinking. Who is the point of contact and decision-maker when multiple technologies converge to form one large whole? Is it the CISO, because security concerns impact IT infrastructure and application operations? Is it the Business Group, because integrated solutions have a substantial advantage and a shorter time to market? Is it necessary for Marketing to take the lead because intuitive user guidance and lesser bounce rates are, after all, the domain of marketing communications?
10 .Regular Control and monitoring
Once everything is in place, it is time to monitor and control. At this point, banks will typically set up alerts for access, users, transactions, locations, amounts, and other factors. If there are any anomalies, the bank will be notified.
Final thoughts
The challenge of API security in a financial ecosystem is not simple. It necessitates a lot of work and the constant attention of the architects of a banking ecosystem. Open APIs are crucial to the growth of open banking, but they also raise more security issues.
Open API security is critical because it can prevent the leakage of previously inaccessible and even secret data points. Therefore, it’s crucial to have a secure system that can evaluate each open API in real-time and quickly and flexibly verify its security throughout its lifecycle.
Currently, only a select few organisations and experts have the necessary expertise to build a performant, future-proof security framework for open banking. Macro Global is one such organisation. MG’s Open banking and other financial software are built with the primary goal to establish secure, open, and reliable interactions between banks, customers, and businesses.
Start your journey toward open banking with API security.
MG’s views on the Joint statement from HM Treasury, CMA, FCA, & PSR on the future of Open Banking
A joint statement was released on March 25, 2022, by Payment Systems Regulator (PSR), Financial Conduct Authority (FCA), CMA, and HM Treasury, announcing their collaboration on the future vision & governance of open banking and the formation of a Joint Regulatory Oversight Committee (the Committee). Further, on December 16, 2022, the committee discussed the update on the progress, the vision and innovative ideas for how the future entity should function.
This is expected to bring major changes and reforms in Open Banking, enhancing development across various spheres. Open banking has increased the UK’s international competitiveness and leadership and has also benefitted customers, businesses, and the broader economy, promoting economic growth.
Let us elucidate on what would be the impact of these statements, and how Tavas, a new-gen, platform is fuelling the development of open banking, and leveraging the future of the FinTech Industry.
The impact of the Joint Statement
Three priorities identified are to unlock the potential of Open Banking payments to support competition and innovation, and to adopt a scalable model for future data-sharing propositions. Further, the focus is also on establishing a sustainable foundation for the ongoing development of the Open Banking ecosystem.
The Strategic Working Group (SWG), convened by the Joint Regulatory Oversight Committee (JROC) and independently chaired by Bryan Zhang, is providing a comprehensive analysis that reflects the variety of stakeholder perspectives on Open Banking’s current gaps, potential short- and long-term solutions, and the structures required to further develop Open Banking and define a future roadmap. The final report of the SWG, which will be given to the Joint Regulatory Oversight Committee by January 2023, will be a crucial factor in JROC’s deliberations.
In the interim, we anticipate the future entity to begin delivering priority non-Order activities, with cooperation from regulators, as necessary. The transitional state will terminate when a permanent regulatory framework is in place. The framework will be supported by all applicable legislation.
The blueprint of the future entity includes
The Joint Regulatory Oversight Committee has a key vision for the future:
- Empower Open Banking products and services. Drive competition in financial services that benefit both consumers and businesses
- Strong technical infrastructure and services enhancing new standards
- Ensuring cohesive collaboration with partners like Pay.UK concerning Faster Payments Scheme rules.
There are three essential components that the work addresses
- To enable Open Banking to thrive, a long-term regulatory framework needs to be established and will include the relevant regulator
with powers of review, variation, or withdrawal (subject to CMA judgement). - The CMA Order is in effect before permanent regulations are set up an interim state will exist.
- To ensure usability across all users of services and capabilities, it is important that financing for this future entity comprises broad-based equitable funding which efficiently distributes costs proportionally
- In the interim state, various principles implied on non-order activities, encompassing new activities, services or infrastructure would be discussed.
- The purpose of the entity, including playing a significant role in the development and growth of Open Banking, should be reflected in its governance arrangements.
- Any fees/liability arrangements should also take into consideration these same factors.
Interaction with further open banking operations
Joint Regulatory Oversight Committee’s work and transition planning to assess any legislation required to underpin the long-term regulatory framework for Open Banking will ensure the objectives are met.
Next actions
- CMA will announce the completion of the present road map.
- In the first quarter of 2023, the Committee will make public its suggestions
About the design of the new institution, both during the interim stage and once a long-term regulatory framework is in place, as well as its vision for Open Banking.
The Committee will continue to coordinate to ensure all activities align to achieve the vision set.
MG's View on the Joint statement
The joint statement, focussing on emerging thinking, which encompasses the design of a future Open Banking entity has been revealed lately. This joint statement has added additional focus to ensure that the operation reaches more people effectively, along with a technical roadmap envisioning a broader schema of design, implementation, effectiveness, and operations of open banking. The SWG’s extensive analysis would reflect the range of stakeholder views it has gathered during a series of “strategy sprints” in recent months. Also, a further statement is yet to be released in the first quarter of 2023. This will open the views, and recommendations with futuristic insights.
In the series of Sprint Strategy, the committee consists of a range of industry representatives, subject matter experts’ consumers, businesspeople, and other prominent stakeholders who have given their views addressing the current gaps, short-and long-term solutions, along with the structures required to further develop Open Banking and define a future roadmap. According to the latest announcement, two expert panels from the SWG’s team will be set up to lead the payments strategy sprint and the data strategy sprint. The duration of each sprint would be for three weeks, starting with a one-hour “kick-off” session and followed by a two-hour sprint discussion agenda. We expect that JROC would prioritise existing issues rather than getting narrow with topics regarding ESG amongst other considerations during this period.
The advent of this joint statement is to promote the prominence of quick, efficient, and convenient data transmission methods to the third-party banking service provider, enhancing greater competition and innovation that would benefit consumers, businesses, and the wider economy. As a result, a boom in boosting the economy of the UK and fostering international leadership in this field can be achieved swiftly. This fuels the unlocking of Open Banking payments to enhance a plethora of newer options for payments, and tailored services that would reinvent a plethora of possibilities, and bring more prospects into open banking that would help invoke newer opportunities.
In addition to unlocking Open Banking payments, HM Treasury, the FCA, PSR, and CMA are focused on “Adopting a model that is scalable for future data sharing propositions”, and “Establishing a sustainable footing for the ongoing development of the Open Banking ecosystem.”
Increased impetus toward open banking – What Financial Institutions should do?
There are almost five million active users in UK. The trajectory had gained momentum in the last five years. According to the Statista Research Department, Europe has almost 12.2 million, open banking users, and is expected to reach 63.8 million by 2024. As of 2020, 24.7 million individuals worldwide used open banking services, a number that is forecast to reach 132.2 million by 2024. It is important to note that, the growth reached a great momentum between 2020 to 2024, at an almost 50% increase.
When much of the emphasis is on the security of all the transactions, where most of the data are exposed to several vulnerabilities, it is highly mandatory to enable comprehensive protection. Various financial regulatory boards and organisations are constantly working towards bringing holistic effectiveness to increase operability, facilitate ease of transactions, offer seamless operations, and strengthen the open-banking system.
The backbone of the Open Banking system lies in the modern platforms that offer a plethora of options including robust dataflow, advanced API, and adherence to strict compliance and regulations. With advanced options to choose between cloud-based architecture or an on-premises, it opens newer choices for the clients to choose efficiency and cost-effectiveness compared to the traditional methods of banking.
How Tavas will help achieve the vision?
As a comprehensive Open Banking product suite, TAVAS focuses on creating a consumer-centric digital payment transformation, encompassing advanced features with great security. Adhering to strict compliances, and regulations to achieve interoperability and stay in control of the endlessly changing payments ecosystem. TAVAS supports a robust data flow serving the Open Banking security conformance and accelerating an array of features for secure deployment of open APIs compliant with OBIE API Specifications. Along with that, it has an integrated developer portal and Open API sandbox that helps third-party providers to build and develop Open Banking APIs. Feature-rich platform with vital Data-quality controls and integrity checks offers resilience and complete end-to-end open banking solutions
As being highly inter-operable, and efficient to handle massive accounts of transactions along with a high volume of payment requests ensuring the integrity and validity of every transaction has made TAVAS, the most reliable solution.
Encompassing all the features required to build a comprehensive platform, Tavas has become a boon for banks, to expand and enhance customer satisfaction, and bring futuristic advancement proactively. To partner with us, call us at +44 (0)204 574 2433 or mail us at salesdesk@macroglobal.co.uk. Our executives will stay connected with you to understand your requirements.
Open Banking to Open Finance – Exploring the benefits, risks & opportunities
Open Banking becomes an older topic for now as Europe has been talking about it for the past two years. Open Finance is currently a hot topic in the financial industry, but what exactly is Open Finance?
“Open Finance” refers to any Open Banking activity that extends beyond the regulatory scope of PSD2’s Access to Account provisions. As a result, data sharing and payment initiation via APIs that extend further into payment accounts, payment services, and payment service providers defined by PSD2 (Payment Service Directive 2) come under the scope of Open Finance.
Regulatory interventions set up the groundwork for Open Banking. Because of this, the Open Banking market is evolving, and new products and services are being introduced as customer adoption of these new payment methods are increasing. Open Banking facilitates the sharing access of customer financial data more securely to make life easier. The Open Banking capabilities developed by firms ranging from incumbent to challenger banks and FinTech firms have proven to be effective in delivering consumer and market utility. The distributed technology has laid the groundwork for Open Finance to expand for even greater customer benefit.
Open finance extends beyond the data and services provided by the banks to encompass customers’ entire financial footprint. A trusted third party could access financial data related to pensions, taxes, and insurance with consent from the customers. This paves the way for more tailored consumer services, including payments and other financial products.
Third-party providers can use open application programming interfaces (APIs) to build applications and services that add value to consumers, by providing exclusive data-driven insights, streamlining the user experience, or simplifying payments.
How Open Finance differs from Open Banking?
Till now, the distinctions between Open Banking and Open Finance are not clear. However, we can identify some differences based on what is happening around the world, whether through regulatory actions or market-driven initiatives:
- API Providers (ASPSPs): In Open Banking, banks and other financial institutions are considered as the API providers. In Open Finance, other account holders such as insurance companies, pension funds, and wealth managers, can provide Open Finance APIs.
- API Clients (TPPs): Open Finance APIs can address a variety of ‘clients,’ including TPPs regulated by a National Competent Authority (NCA) under PSD2 and organisations that are not regulated by an NCA.
- Security: NCA-issued authorisation numbers, PSD2 eIDAS certificates, and/or scheme lists may or may not be used for Open Finance client identification.
- Contracts: Commercial contracts between the API Provider and the API Client may be needed for Open Finance APIs.
The Regulatory Framework for Open Finance
The European Commission issued some correspondence on the EU (European Union) Retail Payments Strategy in September 2020. It established several objectives for the EU’s Digital Finance Strategy. One of them was to promote data-driven innovation, specifically improved data access and data sharing within the financial sector. The Commission also acknowledges the need for an Open Finance Framework by 2024 and plans to propose one in mid-2022.
There is a contradiction in defining Open Finance as the non-regulated, value-added space because services introduced today as Open Finance will no longer be Open Finance if they are regulated later. That could be a problem at some point of time.
Open Finance access is allowed, provided that only the data owner or a third party authorised by the owner has access to the data. Furthermore, due to the risks and sensitivity of financial data, there must be certain level of control over data access, which can be carried out through customer consent, contractual agreements, qualified certificates, or other means. Open Finance is an ethical process because it is transparent and effective for all parties involved.
Account Servicing Payment Services Providers (ASPSPs or banks) and Third-Party Providers (TPPs) or regulated entities are not the only ones who can take part in Open Finance. It applies to financial institutions (e.g., banks, financing companies, insurance companies), as well as merchants, utility companies, corporates, Small and Medium-sized Enterprises (SMEs), and individuals.
Advantages of Open Finance
Regulators and industry stakeholders acknowledge the importance of Open Finance and outline some of its expected benefits:
- Improves user experience by supplying customised products and services.
- Enables wiser financial decisions and improved financial management.
- Improves efficiency and productivity for big corporates and small and medium-sized businesses.
- Increase competition among financial service providers, fostering innovation, new service development, and increased demand.
What is the future of Open Finance?
Open Finance is the logical next step in applying the Open Banking concept to a much broader range of financial products and services, including insurance, pensions and even in other domains such as healthcare and more. The opportunity to improve savers’ overall financial well-being is enormous. However, much work is still to be done to get it off the ground, beginning with regulations, standardisation of the technology, and the development of new use cases to show the benefits it can provide.
We are excited to see what the future holds for Open Finance in general, as well as the innovations it may bring to the pensions industry to improve consumers’ insights, decision-making, and financial well-being.
From Open Banking to Open Finance and then to Open Data – New gateways
Open Finance is not the end, it is the beginning of financial industry evolution. It brings us closer to Open Data and a data-driven world in which all the industrial ecosystems are interconnected.
As a result, industries must embrace and incorporate Open Finance into their culture. Open Finance is pushing the industries into new innovative water, and those who swim in it will be better positioned to succeed in the upcoming Open Data reality.
Open Data services facilitate the customers to access and share their financial data with the approved third-party providers (TPPs), fostering the innovation of ground-breaking products and services that aid customers in better engaging with their finances, making empowered decisions, and accessing tailored products and services. Open Data is being utilised in the Account verification process, Credit checks and other PFM platforms.
Open Data brings more advantages to the customers. Some of them are
- Improved financial decision-making.
- Increased access to advice and guidance.
- Better borrowing decisions.
- Enhanced user experiences.
- Increased financial awareness.
What are the potential implications of Open Finance?
This would be the debating question in the market currently. Open Finance could reduce costs and increase benefits for customers. A low barrier to entry, achieved through the low-cost reuse of existing capabilities, will secure the ability to bring solutions to market for consumers more quickly.
Open Finance has the potential to reduce fraud, improve financial well-being, expand credit availability, supply more payment options, and enable reusable digital identities. Each of these outcomes stands for a significant undertaking.
The challenge for future work is to identify the priorities where success is more likely to describe collaborative action from the industry players, government, customers, and regulatory bodies. It enables open access to data to identify the possibilities and opportunities around open finance and to set a mandate on what could be done.
By focusing on customer outcomes, we are also in the best position to directly address the issues that most trouble individuals and businesses, and which Open Finance has the potential to resolve.
Conclusion
The industry is already moving forward with several initiatives aimed at achieving the results as part of the evolution of open finance. The emphasis will be on integrating and putting into practice the various initiatives, such as enhanced fraud data sharing initiatives and access to all the available data sources. In other areas, business is showing thought leadership on how Open Finance could encourage entrepreneurial behaviour, for instance, by removing obstacles to the formation and operation of SMEs.
Open Banking: AISP, PISP & ASPSP Explained
Open Banking has been driving a spectacular impact on the financial world since January 2018, disrupting everything from payment solutions and budgeting tools to lending applications and credit analyses.
But what exactly do Open Banking providers do? Regulated providers construct and maintain the digital pipes that enable banks to securely request data and payments.
Open Banking is currently being used by individuals, lenders, and financial institutions to substitute the legacy manual and increasingly complex processes. The ability to collect and view insights derived directly from bank transaction data in real-time is extremely powerful, but it can be overwhelming for businesses that have never worked with this data before. Understanding how the technology works and what technology companies are doing with it can help you come up with new uses for it.
Open Banking relies on third-party providers (TPPs) who can provide two core Open Banking services through two separate FCA authorizations:
- Account Information Service Provider (AISP): a person who is authorised to retrieve account information from banks and financial institutions.
- Payment Initiation Service Provider (PISP): a person or entity who is authorised to initiate payments into or out of a user’s account.
Companies that want to be regulated as an AISP or PISP must go through a rigorous application process with the FCA. Some Open Banking providers can be regulated as both an AISP and a PISP, but many only have one.
AISPs and PISPs manage client consent required for Open Banking data access. This implies that each AISP and PISP explicitly state to the end-user what data will be handled, for how long, and with whom it will be shared. This digital consent journey also serves as the foundation for GDPR information processing for AISPs and PISPs.
Account Information Service Providers (AISPs) explained
An AISP is a company that has been granted permission to access an individual’s or SME’s financial institution account data. The UK’s nine largest banks are required by law to comply with the AISPs’ requests. The framework and technical specifications of Open Banking allow for the retrieval of years of transaction history in seconds.
What are AISPs capable of?Being an authorised AISP means that a company can request permission to connect to a bank account and use the information from that bank account to provide a service.
Some AISPs do not have permission to access the bank account information as they are granted “read-only” permission. They can look but not touch, which means they can’t move a customer’s money.
AISP-related services and tools include price comparison, money management tools, faster and more accurate access to financial products, and speeding up manual processes such as applying for a mortgage or a loan, among others.
Examples of AISP applications include:
- Money management tools: some AISPs collect financial data and disseminate it in a way that allows people to easily understand their financial situation, create a budget, and track spending. These new personal finance tools combine data from multiple bank accounts so that users can see their entire spending history in one place.
- Loan applications: Some AISPs, such as Credit Kudos, use this same capability to allow customers to share financial information securely and quickly with a lender or broker. Lenders also use account information-derived data and metrics to improve credit and affordability decisions. This procedure expedites traditional underwriting by eliminating the need for lenders to manually compile and verify bank statements. Better insights benefit the lenders and can provide a better customer experience to the borrower.
Payment Initiation Service Providers (PISPs) explained
PISPs are authorised to make payments on behalf of customers rather than just viewing account data. PISPs accomplish this by initiating direct transfers to or from the payer’s bank account using the bank’s tools.
What are PISPs capable of?Businesses that are authorised PISPs may request permission to connect to a bank account and initiate payments from the customer’s bank account.
There are a variety of reasons why you might want a business to initiate payments for you. For example, an app that helps you handle money in your multiple savings and current accounts to ensure you never go overdrawn and don’t have to pay potentially substantial overdraft fees. This type of capability is possible in retail, where you allow a company that you shop with frequently online to connect to your bank, so you get fast checkout and don’t have to re-enter card details for every transfer of funds.
Examples of PISP applications include:- Financial management tools: A few new money management and savings apps transfer a small proportion of someone’s balance each week to a savings account according to a predetermined process. Open Banking has also facilitated new tools that automatically transfer money between accounts on behalf of customers to avoid overdraft fees.
- Business solutions: New tools integrate with back-office systems, allowing businesses to securely manage payments and collections, make real-time bank transfers, and gain greater payment visibility.
Account Servicing Payment Service Providers (ASPSP) explained
Account Servicing Payment Service Providers provide and manage payment accounts for payment service users (PSUs). ASPSPs have typically been banks and similar financial institutions including building societies, and payment companies.
The number of banks and building societies providing open banking services is increasing. Only the UK’s nine largest banks and building societies are required to make your data available through open banking now. Smaller banks and building societies also can participate in open banking.
ASPSPs release Read/Write APIs as part of Open Banking. These allow consumers to share their account transaction data with third-party providers, who can then initiate payments on their behalf. PSD2 requires all ASPSPs in Europe to participate in open banking and provide data access.
How do open banking and screen scraping compare?
Screen scraping (also known as credential sharing) is an old technique for gaining access to a customer’s bank account to retrieve transaction data. Screen scraping works as stated below:
The customer provides their login information to a third-party provider (TPP). The TPP uses these details to log in to the customer’s bank account. The TPP then copies or “scrapes” the customer’s bank data for use outside of the customer’s banking app.
Before open banking, the only way for apps to access customers’ bank accounts was through screen scraping. Online accounting software packages made extensive use of it. Open banking, on the other hand, is a more secure method because it does not require the customer’s credentials and is thus much more secure.
eIDAS certificate
Electronic signatures can have the same legal validity as handwritten signatures under a 2016 EU regulation. However, such signatures must meet the requirements of eIDAS (electronic Identification, Authentication, and Trust Services). eIDAS certificates enable ASPSPs such as banks in European open banking to identify and authorise API connections from Third Party Providers such as PISPs and AISPs. This is critical in preventing unauthorised access to bank accounts. Since Brexit, only UK-authorized Third-Party Providers can use eIDAS certificates.
Open Banking API providers and their requirements
There is no ‘official’ API for Open Banking. Instead, banks and Technical Service Providers provide their APIs that must adhere to the Open Banking Standard specifications released by Open Banking Implementation Entity (OBIE) which is an official organisation that supervises the Open Banking implementation in the UK. The Open Data API Specification governs how banks develop access endpoints for Third Party Providers (TPPs). It defines how TPPs can use a bank’s Read/Write API. You can find the list of Open banking API specifications on the OBIE website.
Read/Write API specifications
The Read/Write API specification is the primary API specification that governs how third-party providers should connect to banks. It enables Third Party Providers (TPPs) to obtain access to bank accounts for both read and write purposes, for example, fetching account balances and transaction details to make authorised payments. Through the Dynamic Client Registration process, banks allow the Third-Party Providers to enrol automatically without the need to authenticate each one manually. API performance, uptime, and reliability are critical for open banking. Since there is no single official open banking API and each bank develops APIs on its own as per OBIE specifications, the performance of the API of each bank may differ.
Macro Global’s Tavas Open Banking Product Suite and Solutions offers a bundle of solutions to any ASPSPs to extend beyond the scope of monetisation tore-engineer the bank’s portfolio and business model.
- Identity and Access Management
- Developer Portal and Sandbox Environment
- Financial Grade Open Banking APIs
- Strong Customer Authentication
- Administration Portal
- Modified Customer Interface- Fallback Arrangement
- App2App Authentication
- Regulatory Reporting
To learn more about how Macro Global can assist you in monitoring, managing, and mitigating the aforementioned challenges, please visit Tavas – Open Banking Product Suite and Solutions.
