Welcome to Open Banking

Open Banking and Banking Transformation

The entry into force of the new European Directive “PSD2 (Payment Services Directive)”, which became applicable from January 13, 2018, allowed the processing of customers' bank account data by third parties and not exclusively by banks as before. By inherent nature, it triggered the introduction of a new, broader concept of the European banking market itself: an open and easily accessible ecosystem for all customers and all entities.

This concept, designated Open Banking, thus translates into a new model of banking relationship, based on information sharing and transparency, and in which the predisposition for collaboration between financial institutions, fintechs, and other entities is inevitable, as only in this way will they be able to better meet and satisfy the financial needs of their customers.

This directive allows for a new, more central and informed positioning of the consumer in this market. Until now, the significant technological development of recent decades has not been accompanied at the same pace in terms of consumer knowledge and behavior, despite the diversity and multiplicity of offerings, as well as the strong investment in technological transformation that the banking sector has made globally.

While it is a fact that financial institutions have made a strong commitment to digital transformation to make the “customer journey” in banking services easier and more appealing, it is also true that satisfactory results have not been achieved in simplifying language and understanding products, as well as in their contracting. Thus, as a rule, in the financial market, information inherent to products, services, and their terms and conditions is somewhat complex and quite technical, which does not allow for a quick and direct interpretation of the products presented.

Furthermore, with an increasingly diversified offer, consumers in this sector do not have an effective way to compare existing banking products, in light of what they can do in other industries.

Although we are still at the beginning and laying the foundations of Open Banking, the principle of this transformation is quite simple, with the financial market becoming increasingly receptive to changes in various dimensions such as innovation, security, and efficiency.

With this transformation, everyone benefits: in addition to larger financial institutions, smaller banks, fintechs, and, of course, consumers are included. On the other hand, other big names in the technology industry, such as the so-called “GAFAM – (Google, Amazon, Facebook, Apple, and Microsoft)” may also take advantage of these new measures, if they know how to define the correct strategy.

‍

What is Open Banking based on?

From January 13, 2018, in the European space, the non-exclusivity in the retention of information related to their customers' accounts by banking institutions was thus defined, and this information can be transferred to third parties, usually called Third Party Providers (TPP), with the due consent of the user/customer. In this way, with this opening of data processing by third parties and these, in turn, with a total focus on providing personalized information services, highly supported by software prepared for mass data processing, it becomes possible to open new channels, the dissemination of “decision making” tools and highly precise statistical processing in favor of banking service users.

Although the standardization process of this new banking information communication protocol is still ongoing, it thus becomes natural to access virtual platforms with a wide diversity of banking products, originating from various financial institutions, and by inherent nature to choose the most relevant products for current and future financial needs.

‍

What new entities will change the traditional banking relationship?

In addition to new fintechs and the transformation that financial institutions will inherently have to implement, two new types of purely technological service providers officially emerged in the financial market, regulated by the European banking authority. Thus, AISP (Account Information Service Provider) and PISP (Payment Initiation Service Provider) become the new acronyms to be known in the European financial ecosystem.

Both AISPs and PISPs are entities that were created based on security to provide this type of service exclusively through customer consent.

Let's start with AISPs. AISPs, considered companies that manage and provide bank account information, are technological entities that are authorized to collect and store information from each customer's various bank accounts, as well as validate the sharing of this same information with the institutions they choose.

Let's move on to PISPs. PISPs, also known as payment initiation service providers, are considered entities that primarily streamline online payments. They thus make a direct connection between the customer's account and the merchant's, being able to consolidate the payment without going through any intermediary.

In summary, we now have access to a new model of banking relationship, developed with the customer in mind, with new opportunities arising from this fact. In general, there is a diversification of various roles within the banking and financial market, reinforcing the pillars of data democratization, with mandatory security and confidentiality, as well as the introduction of freedom of choice in a more assertive way, resulting from this new “data library” available to the user.

Among various innovations, these new companies can then aggregate information from all their consumers' bank accounts, as well as aggregate information on products from various financial institutions. It therefore seems unquestionable that the simplification of habitually complex banking operational processes will gain its space, which, from the point of view of companies and business professionals, will save immense time, promote efficiency, and reinforce the strategic focus on the “core” activity of each company.

Other innovations are appearing and many more will come as a result of this new paradigm.

Open Banking, that is, the open, easily accessible banking ecosystem, is here to stay, and there is a strong predisposition for current financial institutions to also be receptive and collaborate strongly with “fintechs” like nBanks and many others to ultimately satisfy the financial needs of their clients.

No one knows precisely the “design” of the future banking and financial model that European legislation is generating with the new PSD2 (Payment Service Directive).

We know, however, that the paths of transparency, impartiality, and shared information will help pave the right way for this new model.

It is now in our hands to make use of the much-needed banking transformation.

‍