Over the past decade, there has been a slow but impressive overhaul within the European banking sector. Namely, through the introduction of ‘open banking’. With open banking, banks are required to share data with regulated third-party service providers through secure application programming interfaces (APIs).

The appearance of open banking has revolutionised the traditional banking system with user-friendly features that work for human lives fueled by smart technology. Yet open banking is far from being equal across the globe; Europe is one of the more progressive places for open banking to have taken hold. Scandinavia has been ahead of the curve for over a decade, not particularly with open banking (the term was not circulating then), but with their progressive thinking about regulation, where data is shared, and how consumers are protected.

Here’s five things to know about open banking and its impact on transaction processes:

The core of open banking in Europe is the Revised Payment Services Directive (PSD2). The EU introduced PSD2 to bring an integrated and efficient payment system to Europe and to ensure a fair and smooth transaction process within the European market. Without the introduction of this legislation, open banking wouldn’t be possible in Europe. Here’s some additional information on PSD2 and the history of open banking.

While PSD2 resolved several issues surrounding payment security and transparency, the biggest advantage was how it removed the ownership of that consumer data away from banks. This has given a lot of power back to the end user in the ways they could interact with their account, ultimately allowing access to third-party companies to manage financial conditions much more efficiently.

Currently, the EU is already preparing to launch the next stage - PSD3 - which will give customers the opportunity to make even faster transactions with even better security. If you are an Issuer, BaaS, eWallet provider or similar planning for this next stage, you should take the time to consider which step will be best for you: buying or building. 

As stated, one of the biggest advantages of open banking is customer freedom by giving data to their preferred fintech. This will allow third-party services (any company that can do payments or check account balances without having a direct relationship with a customer or their bank) to provide better service based on customer needs.

The open banking system does not only help TTPs, but also opens the door to other companies who can now use data to influence the design of their products and services, gain insights on which sort of products their customers like, reduce costs, and improve overall customer satisfaction. More-so, it can help people who need it most. 

In a recent article by Tink, they expand on how telcos and utility companies are using open banking to navigate economic uncertainty:

“Open banking gives access to real-time transaction and balance data, allowing telcos and energy suppliers to gain valuable insights into the financial situation of their customers. In these uncertain economic times, when affordability is a growing concern, businesses that can protect their most vulnerable customers from dishonour or overdraft fees are more likely to be rewarded with long-term customer loyalty.”

Traditional banks lack flexibility in transactions and other user-related services. Open banking changes this, setting our sights on a frictionless future. 

More specifically, fintechs are enabling the functionality opened up through open banking, as it is not possible for an end user to use open banking APIs directly. This allows end users to easily track their transactions, makes switching services easier, and makes transactions smoother and faster. In addition, open banking allows you to pay with more than just cards; choose any payment gateway system you like for daily transactions. 

The lesson here is simple: adding extra steps to any payment process decreases customer satisfaction. But, by making customer identification simple and the authentication process as streamlined as possible, you reduce end-user friction. This means satisfied customers, completed payments, and happier merchants.

One of the core benefits of open banking is the assurance of safety and security while making transactions. Here we give a lot of credit to the Directive of the European Parliament and the Council for their security-focused PSD2 (and RTS) legislation. The goals included:

• to contribute to a more integrated and efficient European payments market
• to make payments safer and more secure
• to enhance protection for European consumers and businesses

While PSD1 was all about protecting consumers via One Time Passwords (OTPs) via SMS, PSD2 ordered an improved authentication system called Strong Customer Authentication (SCA). This required two factor authentication (2FA), because adding a second factor to the authentication process - whether possession, inherence or knowledge - helps to fight cybercrime and fraud.

If you're looking for more on the subject of security and want to take a look at how transactions have been protected in the past and what it will take to protect them in the future, check out our post on future-proof security.

Although it hasn’t been very long since open banking was widely introduced in Europe, it has already made a huge difference. And in the future, open banking will surely be a standard for all kinds of financial services, and continue to offer an environment for innovation.

If you are to keep your eyes open for any further trends, we say to look to embedded finance. EF describes financial services, such as payments, that are integrated directly into the offerings and processes of non-bank and non-financial service providers. There is also banking-as-a-service, or BaaS - a subset of embedded finance which focuses more on allowing companies to offer their banking services. For a more thorough discussion on these subjects, check out this recent post.

Open banking has started to change the shape of the global banking system by providing security, customer-centric features, and innovative solutions, making it a much better system to align with the latest technologies.

However, even in Europe where progress is being made, open banking is still in its infancy. While PSD2 helped accelerate some change and created new business models, for most of Europe (and even for other countries like the United States) there still is a long way to go.

With Open Finance continue to rise as a heated topic, PSD3 should certainly leverage data sharing and bring related innovation to more verticals than just banking and payments.  

How is your security around transactions and their authentication processes? Join in on the conversation with us via LinkedIn .

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This post has been inspired by information via UK Tech News - the home of UK tech.