Established banking institutions have long been viewed as titans of finance, the powerful gatekeepers of wealth and monetary power – but perhaps not for much longer.
For good or ill, a monumental change is on the horizon for those in the banking world. In fact, given that nearly every industry deals with financial institutions on a day-to-day basis, it would be fair to say that the power dynamics and operations of current financial institutions will have changed dramatically by 2018. The source of this shift is an innocuous four-character acronym: PSD2.
Otherwise known as Second Payment Services Directive, PSD2 is an EU mandate that embraces the open banking movement by removing a bank’s previously ironclad monopoly over a client’s account. Should a consumer choose to allow a third-party app to manage their finances, their bank will be obliged to relinquish their managerial hold over that account and allow outside access.
For established banks used to a degree of control over their clients, such a drastic change is nothing short of earthshaking. As Viola Hellström, VP of Communications and Financial Services puts it: “The new EU directive opens the door to any company interested in eating a bank’s lunch.” Suffice to say, the fast-approaching onslaught of the open banking system seems like a bad dream for those working in traditional banks, and a brilliant opportunity for FinTech innovators. The directive is scheduled to take hold in early 2018.
Now, the fact that the directive stems from the EU is significant. PSD2 is an indirect result of the Competition and Market Authority’s finding in August of 2016 “that older and larger banks do not have to compete hard enough for customers’ business.” The CMA further suggested that an open banking system – one that allows for greater third-party access and consumer flexibility – would be the ideal way to level the playing field for smaller financial institutions and prioritize consumer consent in the banking sector.
The CMA’s recommendation and the implementation of PSD2 make sense in the financial landscape of the UK, where a grand total of four banks have a comfortable hold over the market and competition is badly needed to break up settled power allocations.
However, movement towards a similar policy in the United States has been considerably slower. While US-based FinTech companies have created and promoted third-party account aggregator apps for consumer use, their efforts have been somewhat stymied. Given the lack of any official mandate like PSD2, established banks can refuse to share data and thereby cut the legs out from under any attempts at a voluntary open banking system in the US.
PSD2 takes hold in 2018 and means to prioritize the consumer and kickstart a positive environment for third-party developers – but a great deal of work still needs to be done in order to ensure that consumer information stays safe amid third-party engagement. In other words, there needs to be a mandatory system in place which allows consumers to apply consent without supplying their credentials, such as the OIDC.
There is no doubt that open banking mandates like PSD2 open doors for small financial institutions, third-party app developers, and everyday consumers, and additionally cut down on the restrictive power of large institutions. However, it would be a mistake to assume that such a directive won’t come with growing pains.
For now, the best path for US banks and consumers might be to sit back and observe as PSD2 revolutionizes the EU’s financial landscape – and then make an informed decision on which policies should be adopted and which might be best left alone.
Victor Notaro is an accomplished Corporate Banking Executive with a demonstrated record of success leading consultative and relationship management strategies in the financial services industry. Victor Notaro is skilled at building and managing high performing teams of professionals in commercial and corporate banking, fostering relationships with middle market and multi-billion dollar companies. Victor Notaro’s record reveals exceptional performance in the development of business capital strategy, with expertise spanning start-up of business units, leading YOY revenue growth, and producing sales in the millions of dollars. Victor Notaro is the Senior Vice President, Corporate Banking / MidCorporate Banking at Citizens Financial Group. Please follow him on Twitter and LinkedIn to learn more!