Open Banking and PSD2 holds a great deal of promise for lenders, as access to consumer and business transaction information, combined with instant, low-cost payments, mean that lenders can make smarter, faster decisions about who to lend to.
But for all this promise, expanding open banking-powered products and services through EU markets is something that few businesses are doing. In this post, we take a look at some of the challenges and questions lenders need to ask when expanding their open banking solutions through the UK and EU.
The potential offered by open banking
By now you are probably familiar with the concept of open banking, but just to briefly recap, the principle is that banks must share account data with third parties, under strict regulations, not the least of which is that the applicant or customer (be they an individual or business) must give their consent.
This is a simple concept. However, it offers a ground-breaking advantage for early movers in the lending industry, by enabling you to almost instantly build an accurate, detailed, up-to-date financial profile of your applicant, without any manual processes, and free of unstructured data and human error. Among other things, the accuracy and speed of working with open banking in this manner allows you to do the following.
- Verify applicants’ identities much more quickly.
- Make faster and better-informed credit and affordability decisions.
- Reduce fraud risk.
- Provide a better customer experience due to the speed and ease of onboarding.
- Speed up your cash flow due to being able to close deals more quickly.
And these advantages are just one part of the story. Lenders can further speed up their cashflow, lower fraud, and provide a better customer experience with open banking payments.
The challenge: there are lots of banks, and bank APIs are not standardised or consistent
The vision of open banking is promising – even transformational. But the reality is more complex, for three key reasons.
1. Banks have different connection specifications and requirements.
While banks are mandated to open accounts to share data and initiate payments, they are not mandated to do it within strict specifications. Most banks have different API specifications or requirements, including differences in payment flows, fields, statuses, and IDs.
2. There are a number of API standards used for open banking in Europe.
In 2020 there were almost 6,000 banks operating in Europe. While they are mandated to offer connections via Open Banking in the UK and PSD2 in the EU, the standards are not uniform across each country.
3. You need to monitor connections and maintain bank communication.
It is imperative to constantly monitor your connections once they are built, for scheduled and unscheduled downtime, and updates and improvements made the by the bank. It is also necessary to maintain communication with the bank to be aware of these upcoming changes and downtime as much as possible.
This is important not just to maintain connectivity, but also to proactively communicate to customers if a connection is down.
And you need to be licensed
In addition to building and maintaining APIs, you must either also be licensed under PSD2 in the EU and/or by the FCA in the UK.
For both licenses, there are long application processes (nine months+), and operational changes required. Some things organisations need to look at include Know Your Customer (KYC) compliance, security risk management, anti-money laundering and combating financing of terrorism, and so on.
Can third-party providers solve these challenges?
The points above make a clear case for why businesses should partner with a third-party provider (TPP) specialised in building and maintaining open banking connections. And indeed, there has been a well-documented explosion in the number of startups offering open banking/PSD2 connections in different European markets over the past several years.
However, it also seems that the huge number of banks and variety in API standards have meant that many TPPs have chosen to focus on single, or only a few, markets. And still other startups are backed by payments networks which may - for certain businesses - present questions over where their real priorities and interests lie. So although there are a number of innovative TPPs that can solve many challenges around open banking, only a few can offer a truly independent, pan-European solution.
Questions to ask your prospective open banking TPP
Every business has different needs. Although expanding into new markets can be very attractive, not every business needs or wants to do this. But for those businesses that are already operating cross-border, or are planning to do so in the future, it is worth asking your prospective TPP about the following:
- Coverage of the markets you are interested in.
- Which banks they are connected to in these markets.
- What their roadmap for building out new connections is.
- What their security protocols are.
- Whether they have their own licenses in both the EU and UK.
- How reliable and stable their API is.
Partnering with Yolt for pan-European expansion
Scaling open banking innovation across current and planned European markets can help you gain a competitive edge, so choosing the right partner for pan-European expansion is critical to ensure you maximise speed and scalability. By asking the right questions, you are setting yourself up for long-term success.
Yolt offers connections to more than 600 banks in Europe and the UK, and is licensed under PSD2 and by the FCA in the UK, making it a true independent provider of pan-European AIS and open banking payments solutions.
Find out moreContact us