July 05, 2022
PSD2 in review
The European Commission’s review of the Revised Payment Services Directive (PSD2) aims to gather evidence on its impact, as well as assess the appropriateness of a legislative proposal for revising PSD2. Although PSD2 played an instrumental role in encouraging new, data-driven approaches to traditional banking, third party providers (TPPs) face four major challenges in the current system, which need to be addressed if the full potential of open banking is to be achieved.
Beyond these four challenges, Plaid believes that the Commission could go further in its reforms to PSD2, particularly if the European Union wants to continue leading in tech-enabled innovations in the financial services market.
The four challenges TPPs face under PSD2
PSD2 gave consumers the right to share their payments data with authorised TPPs, driving rapid, transformational change in the financial services market across the European Union by delivering new products and services and enhancing competition in the market. In spite of the gains that have been made, TPPs continue to face four major challenges in the existing PSD2 ecosystem, which is holding back the full potential of open banking. These include:
The inability to access consumers’ accounts due to poor quality APIs, redirecting consumers back to the ASPSP to authenticate, requiring customers to manually input their account information, and refusal of access, for example;
Issues with Strong Customer Authentication (SCA), such as consumers being required to re-consent to using TPPs every 90 days for Account Information Services (AIS) flows, a process that is managed by the banks, and onerous SCA prompts. Users can be prompted up to 4 times for SCA for a single transfer through a Payment Initiation Service Provider (PISP);
Ongoing burdens on TPPs, such as daily limits on API calls, conflicting regulatory requirements such as PSD2 requiring TPPs to analyse data that they are not privy to processing under the General Data Protection Regulation (GDPR), and legal requirements to perform anti-money laundering procedures that far exceed the riskiness of the product being offered;
Inconsistent adoption and enforcement of PSD2 across the single market, such as inconsistent definitions across countries, incidents of IBAN discrimination across non-local IBAN numbers, among other issues.
Five solutions for the challenges TPPs face under PSD2
PSD2 must be revised if the full potential of open banking is to be realised. Based on our experience, the Commission should adopt the following five solutions to address the challenges outlined above:
Focus on optimising user experience (UX), such as enabling TPPs to manage authentication, rather than redirecting back to the ASPSP, while also establishing standardised access protocols across the single market. In particular, there should be stronger enforcement of API uptime and less reliance on national API standards;
Create a more flexible TPP-led authentication method and limits on the number of SCA prompts. TPPs should manage consent and the 90 day re-consent for AIS flows at the bank should be removed;
Remove the burdens on TPPs, such as no more daily limits on API calls;
Descope Account Information Services (AIS) from Anti-Money Laundering (AML) procedures, while also bringing requirements for PISPs in line with existing procedures when initiating payments;
Enforce compliance with PSD2 and the Regulatory Technical Standards (RTS), particularly for ASPSPs.
Plaid’s vision for the future of open banking in Europe
The European Commission has a real opportunity to continue leading in tech-enabled innovations in the financial services market. We believe that the Commission could go even further with its reforms to PSD2 - a topic we explored in our previous report, The financial wellbeing revolution: Unlocking the full potential of Open Banking payments in Europe, in addition to our consultation response - by creating incentives for ASPSPs to invest in Open Banking and cooperate with TPPs, while also enshrining all existing and new reforms in regulation rather than as directives to create a level playing field for consumers, banks, and TPPs across Europe.
Most importantly, the Commission should broaden the scope of open banking to open finance. It will enable consumers to better understand their full financial lives beyond payment transactions, create new financial services and products that meet consumer needs, lower costs for consumers and businesses alike, as well as foster more competition in the market.
Plaid’s next policy blog will outline our response to the Commission’s consultation on open finance, and explore three potential use cases: holistic personal and business financial management, mortgage brokerage, and sharing in-vehicle data.
Download a more detailed overview of our submission to the consultation here.