Is regulation enough to propel Open Banking adoption?

Recently, the European Commission set out its intentions to advance open banking with the introduction of PSD3. The update to its Payment Services Directive (PSD2) shows a commitment from the EU to realise the potential of Open Banking, and it’s one welcomed by the industry.

Hans Tesselaar, executive director at BIAN

While PSD3 sets out several key changes to realise its goal of driving Open Banking adoption forward, the aim to standardise payments across the EU with its move from a directive to a regulation poses the question: is widespread adoption possible with regulation alone?

The benefits of regulation

A new Payment Services Regulation will update and replace elements of PSD2 to ensure its rules are applied more consistently across Europe. This new regulation will bolster Open Banking by enforcing better API functionality, allowing smoother payment data sharing and eliminating unnecessary steps hindering data flow.

Apart from refining PSD2, these proposals enhance user control via a centralised dashboard, ensuring easier management of data sharing. In addition, new measures like increased bank cooperation will support the industry’s attempt to combat fraud and elevate consumer confidence.

This regulation puts FinTechs and banks on a level playing field, giving technology providers more control over the service they provide to customers through easier and more secure data sharing, while reducing infrastructure costs.

Europe is not the only country taking a regulatory approach. The UK for example, a pioneer in Open Banking innovation on a global scale, has been prioritising regulation since the launch of Open Banking in 2017 by the Competition and Markets Authority (CMA) following the introduction of PSD2. Now, its recent announcement from the Joint Regulatory Oversight Committee, regarding its commitment to a long-term regulatory framework, reaffirms its commitment in the area.

While these regulatory measures allow fintechs and banks to implement Open Banking more effectively and aim to give customers a seamless experience, independent regulation does limit innovation without the correct considerations.

The realities of regulation

The state of open banking is still very immature, but there is no denying its growth. The number of users worldwide is forecast to reach 132.2 million by 2024, a significant increase from the 24.4 million users in 2020.

Countries like the UK risk reducing their role as a driver of progress without the access to the wider European population that it had before Brexit, as an example. And as the European market is predicted to be the largest open banking market by 2024, the continent as a whole would do well to collaborate to better understand customer needs, react to market demand and expand further.

Being open to learning from global examples and listening to industry leaders, including larger banking institutions with global influence and international exposure, will be important to ensure successful practices are promoted, which will encourage open banking more widely within these countries and different regulatory frameworks.

Meeting the demand

Focusing on regulation must not overshadow market demand, and looking at countries with a market-driven approach, such as Singapore, will reveal what governments and organisations should be prioritising when it comes to open banking.

Singapore’s market-driven stance has led to high open banking adoption. 90% of professionals consider open banking either a ‘must have’ or ‘important’ and a further 90% agree that it has also had a positive impact on the industry and made it more collaborative. This is despite no mandatory requirements.

Adoption has accelerated in APAC over the past few years due to the opportunity it has to make the industry more collaborative and the potential to bring about fairer and more equal financial services. However, the space remains in the early stages of development. Many banks are just starting their digital transformation journeys, and struggling with core legacy systems and closed or outdated architectures. This is why overcoming these barriers and industry collaboration will be at the heart of open banking adoption.

Coreless banking

Regardless of a regulatory or market-driven approach to open banking, banks must create an ecosystem with fintechs, providers and aggregators. This is to boost the speed at which best-of-breed products can be implemented to meet customer demand and make the most of the opportunity that lies within the open banking space.

A coreless banking solution will be key to empowering banks to overcome issues around interoperability and selecting the software vendors needed to obtain these best-in-class solutions for each application. In turn, this will promote industry collaboration and ensure customers are provided with the optimum service to further encourage open banking adoption.

Coreless banking implies that each of the needed (IT)-services works seamlessly together. If this is established, financial institutions can migrate to a “best of breed” environment so they will have the ability to utilize and combine third-party solutions to deliver the best open banking services for their customers.

This means banks can focus on incorporating the technology they need to enable open banking services and respond to customer demand – regardless of whether this is from a regulatory or market-driven starting point – at a faster and more efficient pace.

The answer lies in collaboration.

Is regulation enough for open banking adoption? The short answer is no.

Whether countries decide to push open banking from a regulatory standpoint, or adoption is driven from the market demand, industry collaboration will be the answer. This will enable greater innovation, so from PSD3 in Europe, to Singapore’s market demand, the industry can unlock the ultimate outcome for open banking with an open attitude.