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Open Banking: closed systems have had their day 

Why banks need to open up in the battle for customers

  • The EU wanted to use the last stage of the PSD2 payment directive to herald the age of open banking

  • So far, only a minority of banks have taken major steps towards open banking—but the traditional closed “system bank” has had its day

  • Innovative banks use the mandatory API interfaces not only to take advantage of third-party services, but also to provide their partners with specific account data—of course, only if customers have provided consent in advance.

Open banking is here to stay

Since September 14, 2019, banks are now required to provide third-party providers with an interface to account information of customers that provide consent, meaning that non-banks are now able to also trigger payments and offer account information services. However, at zeb, we estimate that less than 20 percent of the so-called API interfaces are actually fully usable. 
 
The EU wanted to use the last stage of the PSD2 payment directive to herald the age of open banking: the free but secure exchange of account data by third-party providers is intended to offer a wide range of new products and services to customers of traditional banks. However, most banks at first only implemented the bare essentials in order to remain legally compliant. 

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Out of fear, most European banks used PSD2 to improve internal processes with a view to data security or fraud prevention. In doing so, they meet EU requirements, but ignore the vision conceived in Brussels: the separation of the centuries-old bundling of banking infrastructure and banking services in order to create numerous novel customer offers through more competition. 

„Europe’s banks are currently going through a revolution without revolutionaries.“

Erwin Meichenitsch, Partner

Only a handful of European banks are fully involved 

So far, very few banks have taken major steps towards open banking. However, the vast majority of the members of this group see the opening as a one-way street: they aggregate third-party products and services on the bank’s own customer interfaces—mostly online banking sites—and want to enhance their own customer offers by integrating personal finance administration, including credit cards and insurance policies or even mobility apps. 

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Only a handful of banks in continental Europe have fully got on board with PSD2. Not only have these banks used the prescribed API interfaces to take advantage of the services of third parties. They have also started to provide partners with account information of customers who have provided consent in advance. These banks therefore also offer their services via third-party interfaces. Customers can then pay from a wallet or check-out portal or even finance payments. And corporate customers in many countries can already make payments from their own ERP computer systems. 
 
These few banks are currently alone in showing the courage to live by principles of open banking: the traditional closed “system bank” has had its day; partners are not only becoming increasingly important, but must also be treated as equals, be they Apple, Google or an innovative fintech start-up. There is much to suggest that this approach is wiser than the wait-and-see tactics of the other banks. 

Banks should follow the example of telecommunications

Banking is not the first sector that the EU wants to break up by unbundling technical infrastructure and services. Telecommunications companies already had to deal with this kind of liberalization at the end of the 1990s: within five years, Deutsche Telekom lost a fifth of its market share thanks to around 90 new competitors who were able to offer more innovative products and/or more favorable conditions than Deutsche Telekom.
 
Examples from other sectors also demonstrate the fact that waiting or doing nothing in the face of market liberalization is very risky. Companies often first want to save money and efforts in order to be able to profit when the big trend finally takes shape. But all too often it turns out that these hesitant companies do not have the right organizational form to simply jump on the bandwagon. 

PSD2 could cost retail banks 20 percent revenue

At zeb, we estimate that retail banks could lose 20 percent of sales to new providers within the first three to five years of liberalization. At the same time, though, they could make use of the new possibilities offered by open banking to make up for a large part of the losses. For example, they could aggregate all of their customers’ bank data or offer loans to buyers via dealer cooperations.  
 
But implementing changes of this kind requires agility and practice. Banks that are already experimenting with open banking have a much greater chance of benefiting from the next phase of developments. This will come when customers are ready to share their account information. The greatest success will be had by banks that understand that the future of payment transactions lies not only in payments, but also in buying, planning and investing.

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Erwin Meichenitsch

Partner