EU's open banking sparks fintech innovation

European financial institutions are implementing the EU's Payment Services Directive (PSD2), an open banking initiative that became effective Jan. 13, 2018. The new standard requires banks to share consumer account information with regulated open banking third-party service providers. A recent Accenture study, titled The Brave New World of Open Banking, noted efforts are underway to standardize methods for sharing customer data with Account Information Service Providers and Payment Initiation Service Providers.

Drawing parallels between early stage PSD2 adoption and previous historic precedents, the report compares present-day financial institutions with 17th-century (closed) Japanese and (open) Dutch economies. Researchers noted that banks have traditionally traded with each other for hundreds of years, while excluding foreigners "who might disrupt the old way of doing things." They went on to make the following predictions:

• Winners: banks that embrace Open Banking and recognize their walled garden business models are no longer sustainable will win; incumbents that are unwilling or unable to change their business models will lose.

• Losers: Incumbent banks, unwilling or unable to change their business models, will rapidly erode, much like their predecessors in the closed economy of 17th-century Japan.

• Early adopters: Industry participants that seize opportunities early on will derive benefits and greater market share, according to researchers. "Incumbent banks will need to act decisively to secure their share of the new value being created, much like the entrepreneurial traders of the 17th-century open Dutch economy established and then dominated profitable trade routes around the world," researchers wrote.

Walls fall, platforms rise

Accenture's study found competitive and regulatory pressures are impacting the traditional banking value chain. "In this brave new world, bank customers will be able to share access to their financial data with non-bank third parties through open application programming interfaces (APIs)," they wrote. "Third parties will be able to integrate their services with those of a bank to create a better consumer experience. So, what's coming in banking is more akin to the 17th-century Dutch economy than the closed world of 17th-century Japan."

A strategic partnership between London-based companies CashFlows and Open Payments Cloud (OPC), disclosed July 3, 2018, reflects widespread European efforts to remove market barriers and improve operational efficiencies during early stage PSD2 implementation. The companies created a platform that provides fintechs with a single access point to a range of services, including BIN sponsorships, payment processing and Know Your Customer. The companies said fintech start-ups can use CashFlows' BIN sponsorship services to issue prepaid cards, which they described as a growing market.

Jonathan Bennett, chief commercial officer at CashFlows, said Mastercard research indicates prepaid may exceed $500 billion in annual global revenue by 2020 and $131 billion in Europe. "OPC is addressing a real need in the market," he added. "It is continuing the trend of innovation in prepaid, enabling smaller [programs] that previously wouldn't have got off the ground, due to economies of scale, to launch. CashFlows is pleased to be a key partner of OPC and look forward to a highly productive working relationship."

"We're delighted to be working with CashFlows and to welcome them onboard as a founding partner," added Paul Love Twelves, general manager, Open Payments Cloud. "There's a great cultural fit between the two organizations and are both committed to empowering the next generation of payment innovation."

A growing roster of regulated open banking service providers can be found at www.openbanking.org.uk/customers/regulated-providers/ .

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