PSD2 is landing in Europe. What’s happening to Open Banking in North America?
Channels and routes to market are in a state of constant change these days, and there’s no need to leave your home to see it. You can purchase and receive all kinds of goods and services from the comfort of your home, park bench or café easy chair. Any number of companies will collect a meal from the restaurant of your choice and deliver it to your door. Lift sharing companies can connect you with a chauffeur and car in a pretty smart way, too. Of course, all of this has to be paid for, so you’ll need to provide payment details. But what if banks were also subject to this massive upheaval? What if clever new intermediaries came into play and revolutionized this part of our lives as well? Meet Open Banking.
From a consumer’s perspective, Open Banking allows organizations other than their bank access to their bank account – but only if they give explicit permission. Removing the bank as an intermediary gives, in theory at least, access to better service, rates or products. Banks are directed to offer Open Application Programming Interfaces (APIs) so third party payment providers (TPPs) and developers can build applications and services around the financial institution. Examples of third party providers include banks and financial service providers, but also social media platforms, Fintechs, technology suppliers and Payment Service Providers (PSPs). Less obvious, but equally as interested, are retailers, real estate agents, insurers, utilities and telecom providers. It’s safe – in theory – because the consumer must give consent for data to be shared.
Open Banking is in full swing in Europe at the moment, where it’s known as the second Payment Services Directive (PSD2), with privacy and data sharing handled by the General Data Protection Regulation (GDPR). You can get a local perspective on PSD2 via our Banking Insights series report – which also covers some of the early successes and security considerations institutions need to make. Note that any bank with entities or business in the EU has to comply with both PSD2 and GDPR.
Although Open Banking is not mandated in Canada yet, we are preparing. Prior to the Government of Canada launching an Open Banking Advisory Committee in late 2018 to gauge industry and consumer popularity, we saw organizations such as Interac, Canada’s national debit payment network, and The Royal Bank of Canada (RBC) helping new providers drive innovation in the relevant markets. Early last year Interac teamed up with several startups to help them create easier and faster payment experiences for their customers. This was done using Interac’s new e-Transfer® third party API to streamline requesting and receiving money.
RBC is the first Canadian bank to launch a developer portal. The RBC Developers™ portal allows eligible external software developers, industry innovators and clients to access select RBC APIs.
While Open Banking may provide consumer benefits and foster technological innovation in banking, it will also change the financial services ecosystem, leading to new patterns of consumer behaviors and thus, new forms of fraud threat.
Cyber Security and Payment Fraud detection will become even more important in the protection of new interfaces accessing the banks systems. Financial institutions will have to introduce multi factor authentication (MFA) in order to prove you are who you say you are. Multiple forms of online identity and device verification will need to happen in order to protect this newly ‘open data’. Fraud systems will need to be updated with new behavioural rules and predictive models to find new forms of fraud in this new payments landscape and maintain the fine balance between an easy customer experience and catching criminals.
BAE Systems offers specific detections and features to help prevent fraud with the implementation of PSD2, and this experience can help Institutions around the world, not just North America, prepare for Open Banking.
Find more in depth insights into some of the latest trends affecting the banking industry.
Jen Nicol is Manager of the Business Solutions Group at BAE Systems.