Open banking – beginning and adoption
Open banking is known as a series of reforms regarding how banks handle their customers’ financial information, reforms that are regulated through a European directive known as PSD2 (The Revised Payment Services Directive (EU) 2015/2366). In essence, this Directive brings into the financial scene new players, non-banks, that can provide two types of services:
Account information services (AIS)
Payment initiation services (PIS)
These non-banks entities, with the client explicit consent, have access to clients’ bank current accounts through banks’ interfaces called APIs. They are known as TPPs (Third-Party Providers), should be authorized by a Regulatory Entity in each country (NBR for Romania), and the client should always give consent for its bank data to be accessed by the TPP. We talk here about the data democratization concept that states that one should be aware of its personal data value and have full control over it.
The concept of open banking is well-known today and has serious traction throughout the fintech world, in the EU and UK space. This European initiative has a clear purpose of accelerating innovation and competition between financial service providers. It also hopes to boost the products market, creating more and better solutions that will help the end customer efficiently administrate his finances. It’s worth mentioned here as well that the initiative has precise results in the majority of countries that implemented it already, and it is becoming popular in other countries as well, being picked up in various stages by some non-EU countries such as Australia, New Zeeland, Brazil, Mexico, Canada, Hong Kong, Japan, Israel, Singapore, Indonesia, and even Bahrain.
Open banking is about innovation, openness, simplicity, and us, the end consumers of financial services. For more straightforward, securer, and accessible services.
The rise of open finance
As mentioned, the Directive was set up to trigger innovation, and it even managed to take the digitalization race to a whole new level. Banks didn’t just wait to be ‘conquered’ by modern non-banks entities, and they fought back, investing in innovation, fintech, and digital transformation more than ever before. We observed this trend in Romania too, where bank digitalization started timidly in early 2018. Banks understood the movement and aspired to become TPPs, overtaking their initial part of just implementing PSD2.
Open banking seems to be, however, just the beginning. Once customers can and get used to giving consent for their bank to send their transaction history, identification documents, or any other information to any bank or TPP they choose, it becomes relatively easy to change accounts and sign up for loans or credit cards with a new provider. It gives them flexibility, and it’s an excellent opportunity for them to accede to customizable services tailored for their specific needs. This open finance approach is seen now as a step forward for open banking. As open banking proved its efficiency in lowering costs, improving customer experience, opening new markets, and gaining better retention, open finance is expected to enrich these benefits as long as it will be regulated. And there are powerful voices in the markets were open banking works that demand these regulations. In some EU countries, open banking made an essential boost during the pandemic, so these voices demanding more are becoming now justified. So, when we talk about the next chapter, we talk about open finance, meaning that open banking principles will be extended in other services as saving, insurance, mortgages, investments, pensions, and consumer credits.
Next move into the future – the open data ecosystem
Afterward, the model is expecting to spread further to other industries. The analysts of the open banking model exploit the possibility of creating an open data ecosystem that goes beyond the financial industry. This personalized, customer-controlled exchange of data could be extended to other sectors. The end consumer will benefit from customized products and services that best fit their needs, quicker and in an automated manner.
The Romanian realities
We talked a lot here about the future of open banking and the predictions made by the experts in open banking, but what about our immediate realities?
From our perspective, Romania is still at the starting line, not using open banking to its substantiated capacity, but somewhat still struggling to implement the European regulation. The open banking entry barrier is designed to be low, however, it is not kept this way. With a late translation into national legislation (in December 2019), the entities have just stared the process of authorisation with the National Bank of Romania, with none approved at the moment. It feels like Romania lost its start and is failing at the innovation chapter due to late regulatory developments. Fintechs in our country face the inconvenient path to get instead authorized in other countries or to partner-up with other authorized TPPs from abroad. Both options are time and money consuming. This makes it easier for authorised entities from other contries to enter the Romanian market and innovate, than entities from inside the country.
Banks in Romania have the legislative advantages to become the first TPPs authorized in Romania, yet they lack the infrastructural benefits. Even though, as we mentioned earlier, they started their digitalization processes, things are developing heavily and have just begun. The boost other countries in Europe benefited from during this last year of pandemic bypassed Romania this time. We can only hope to reach the UK's level or the Nordic countries in a few years, which will lead to a delayed open finance adoption that will lead to a delayed entry into the open data ecosystem.
So, what can we do? Maybe just rejoice in catching the wave of change and the opportunity granted to us by history. The ecosystem is due to be formed here as well, we benefit from the ideas and the infrastructure, and even with a late start, we can still catch up the innovation wave and ride it ourselves in our way. With a little bit of luck and a bit more work, probably.