Where are we a year on from PSD2?

From an expanding ecosystem, to improvements in APIs, and increased investment – the open banking movement has come a long way since the PSD2 implementation deadline in September 2019. Here’s how we see the progress that’s been made, and where work still needs to be done.

TL;DR – Quick summary

  • We are one year on from the 14 September PSD2 deadline for implementation.

  • Much progress has been made, but there’s still work to do.

  • The ecosystem is expanding, with TPP numbers up 66%.

  • Improvements have been made to APIs, with fewer errors.

  • Investment in open banking is booming - 63% of execs increased spend.

  • Fascinating use cases are coming to market from start-ups and large institutions alike.

A year after the PSD2 deadline we explore the progress made and where work still needs to be done.

It’s been more than a year since 2019’s 14 September deadline – the date when the final pieces of legislation for PSD2 were implemented across Europe, and banks hoped to receive the approval from financial authorities for their PSD2 APIs. At the time, our analysis concluded a grand total of zero APIs were compliant with the legislative requirements – and that we all had a lot to do to ensure open banking would be a success.

Fast forward 12 months and the progress that’s been made is much more positive. We’re not saying every problem has been solved – far from it – but the ecosystem has pulled together in a way we hadn’t seen in 2019, with a surge in open banking positivity and activity.

Ecosystem explosion

Since the September PSD2 deadline, the number of licensed and registered third-party providers (TPPs) has exploded rapidly. According to figures from the European Banking Association’s (EBA) Payment Institution Register, these TPP numbers are up 66% year-on-year.

At the same time, it seems financial institutions no longer see TPPs and fintechs as the threat they did a year ago – as the focus shifts from compliance to opportunity – and collaboration improves between banks, authorities and TPPs.

TPP associations are also springing up across Europe to give feedback to the market, e.g. the European Third Party Providers Association (ETPPA), PayBelgium, and the PSD2 Software Industry Group in the Netherlands, French TPP association – showing how the TPP market has matured.

And the result of all this? Fascinating use cases are coming to market from start-ups and established institutions alike. We’ve seen Goloyal creating the next generation of loyalty programmes in the retail space, Swedish commerce giant Tradera using account verification to simplify onboarding and payouts, and Svalna using financial data to help people understand their carbon footprint – then slash it.

From the traditional banks, we’ve seen Caixa Geral de Depósitos (CGD) build the now award-winning PFM app DABOX in just six months, while ABN AMRO created the No.1 rated PFM app in the Netherlands with Grip.

One of the newest propositions is coming from Insurance giant Allianz, with Hey Money. An app that allows users to manage bank accounts, subscriptions and insurance – with the ability to cancel, switch or take out new products.

The rise in TPPs is boosting innovation across the board – ultimately improving services for end customers.

API improvements

We were pretty vocal about the state of APIs across Europe approaching the September deadline, and while there’s still a way to go, we are happy to see improvements.

At Tink, we measure the quality of APIs against three sets of criteria: API performance, data parity and user experience. All three are benchmarked against the customer interface, which means they have to be as good, or better, than the APIs used for the native mobile banking apps.

If we look at performance, we’re seeing far fewer bank-related errors on API calls today than a year ago – meaning the underlying systems for APIs across Europe are running on more stable infrastructure. A positive step.

There’s still a way to go with data parity, as we’re still seeing significant differences between banks’ data in the same countries. The data transferred through the API is dependent on the bank’s payment service policy – but it’s not always consistent with the user experience. For example, some banks provide 90 days worth of data through their PSD2 API, while others provide 12 months, even though the mobile banking apps can show up to two years of data. So there’s more work to be done here.

Arguably the most important factor to the success of PSD2 and open banking as a movement is the user experience. To that end, the recent EBA Opinion on obstacles echoes a lot of what TPPs have said from the start: PSD2 APIs should not create obstacles that hinder the authorisation process.

Right now, PSD2 APIs are responsible for a 30%-50% drop-out rate during the authentication process, mainly because web redirect (the method used for authenticating towards a bank) pushes people through an inferior user experience. This compares to a 5%-10% drop-out rate for APIs that use reverse engineering, i.e. plugging straight into the same user experience as the bank’s own mobile app.

One example of where improvements have been made is in Belgium. Some of the largest banks have worked internally and with third parties to rapidly improve the user experience. The number of screens that users have to go through to authenticate has been reduced – from around 20 screens, to just five. The result? In September 2020 success rates have gone up from 35% to a whopping 93% – almost on par with the success rate for reverse engineered APIs. And although there are still caveats from a compliance perspective, it's a massively positive step that we know other banks across Europe are striving towards.

Booming investment

Open banking budgets have boomed across Europe in 2020. In our recent research report into the investments being made in open banking, we found the median spend by financial institutions lies between €50 million to €100 million, with 45% of financial executives indicating that their investment budgets are even bigger.

Nearly two-thirds of financial institutions (63%) say their spending has increased compared to 2019 – with only 10% indicating that their spending has contracted. More than 80% of these executives say their budgets are growing by double digits, with a quarter increasing their investment by more than 30% year-on-year.

Most of these open banking investments are spread across an organisation, through operations functions such as compliance, risk, and IT. But there are also a large number of financial executives exploring how open banking can create value for the business itself in terms of revenue, customer satisfaction, and ultimately, costs saved.

What comes across loud and clear is that open banking investment is already massive and budgets are growing – and the industry is on the verge of a monumental shift towards data-driven services.

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