Stijn Van Brussel
Back in 2015, PSD2 was meant to be a game changer. Open access to bank account infrastructure would level the playing field between incumbents and new entrants, boost innovation, and drive account-to-account (A2A) payments adoption. As European regulators have invited a broad group of stakeholders to evaluate the success of PSD2, it’s worth considering what has been achieved and where it points next for the payments industry.
Despite PSD2 aiming to harmonise the payment landscape, the era of open banking has been a lot more uneven, with fragmented interpretations of what ‘open’ really means. This led to consistent issues with API standardisation, functionality and customer experience, limiting the impact and value of this shift.
Despite this, the industry and consumer preferences have continued to move towards an open future, with customers increasingly embracing instant payments, value-added services and a more heterogeneous financial services ecosystem. In this consumer-focused future, it will be the players who can embrace seamless integration, partnerships and customer value who will be able to acquire and grow market share.
The access challenge
When it was announced, PSD2 (Second Payment Services Directive) was the biggest change in banking in decades, particularly for payments.
By opening up banks’ account infrastructure and associated data, PSD2 aimed to make it possible to pay directly from a bank account through a third-party. The idea was to have faster, cheaper, more customer-oriented and flexible payment services, backed by appropriate security, creating a harmonised, competitive, borderless payment ecosystem.
Some elements have been successful, with banking data much more available than before and third-parties able to access transaction data, create user profiles and provide insights for consumers. Providing the right access and functionality for payment initiation, however, remains much more of a challenge – this is because payments, especially in the B2C domain, are much more complex:
1-They’re time-critical, with any delays in initiation, authorization or clearing and settlement slowing down the transaction process, especially for retail.
2-Payments are an existential capability for merchants, with any risk or downtime causing huge commercial challenges for sellers.
3-The bar for success is high, with even a small amount of failed payments affecting trust in the system.
4-Security and compliance require a large amount of checks, along with robust infrastructure and review, with PSD2 reinforcing the need for strong customer authentication.
5-Special transaction types, such as seamless refunds, are must-haves in certain merchant categories.
The result is that the customer experience of A2A payments initiated via standard PSD2 APIs is generally underwhelming, with gaps in penetration by geography and industry, particularly for the in-store environment (POS).
Barriers to change
While PSD2 required banks to open up their account infrastructure and data to third parties, technology choices and actual implementation remained in the hands of individual parties.
This everyone-for-themselves approach created a system where there was less motivation to cooperate and enable mutual value, leading to structural challenges. Under PSD2 institutions develop and guard their own access technology rather than being incentivised to open up integrations for the widest market possible. In the short term, this has led to a fragmented market, but in the long term it could harm the players involved by limited agility and customer value.
1-Non-standardised API access
While banks were pushed to enable API access to their back-end systems, there was a lack of standardised documentation or integration stipulated despite some industry standards being introduced. This required third-parties that want to integrate with bank back-end systems to build individual API connections for each institution according to the bank’s own specification.
This raised costs and extended timelines for service providers, while limiting their range of connections, reducing choice and utility. Aggregators have emerged, which solves the scaling dilemma – at a cost – but not the limited functionality for retail payments.
2-Limited data availability
Along with non-standardised integrations, the data points made available for third-parties are also lacking. This is particularly challenging for payments, given the wide range of information required to build effective, secure, compliant connections between banks and payment schemes, covering compliance, fraud checks, KYC, reconciliation and confirmation.
While banks built new access points for their data, these were welded onto systems of varying age and structure, with all the attendant limitations. When it comes to payments, the ecosystem is limited by the performance of the slowest link in the chain.
This is particularly challenging for retail payments, where transactions need to move in milliseconds, rather than seconds, using card payments as the global performance benchmark.
4-Poor customer experience
For online payments especially, authentication rules require consumers to manage multiple digital environments, moving from store to bank portal to authenticate, sometimes via dedicated devices such as a card reader or physical token, or retrieving a code from an email, adding unnecessary complications for the buyer.
The path to an open future
The key for frictionless and secure retail payments lies in fit-for-purpose APIs, close partnerships and deep integrations with banks, acquirers, PSPs and merchants, driven by aligned technology and relationships. While many providers have limited their approach to integration as a means to retain customers and control, Payconiq believes that leading with openness actually increases retention, value and revenue opportunities for payment providers and banks.
That’s why Payconiq International is creating the next generation of payment infrastructure to bring stakeholders in the payment ecosystem together to benefit all parties. Solving the access challenge starts with fit-for-purpose, but standardised APIs for banks and schemes to enable every other part of the payment process. Not only does this enable stakeholders to efficiently deliver services for payments with all possible edge cases, but also creates a repeatable approach for growing customer volumes. Payconiq aims to accelerate development and iteration, testing, improving and scaling via a single model that provides all user needs.
Rigorous standardisation at the point of API-creation enables Payconiq to build truly scalable infrastructure ready for the next wave of development. While we currently process over 1 billion payments a year, this will only grow as A2A payments move into the mainstream. Our API covers all merchants and payment services providers, building one solution that works for every customer in any region. By building flexibility into our infrastructure, we can create a reliable and highly scalable payment system while leaving space to integrate other best-in-class services via API integration.
Winning on integration, together
While PSD2 failed to fully achieve its goals, it did open the door to a richer payment landscape where innovative players can leverage on their ability to integrate with partners, provide a smooth payment experience and adapt to customer needs to create successful payment solutions and experiences.
The European A2A landscape that kicked off with PSD2 has largely avoided using open banking infrastructure, choosing to build its own rails and partnerships. However, as competition increases among schemes and networks, providers will need to look beyond guarding their own access and prioritise scalability, efficiency and consumer experience, especially as domestic schemes confront the demands of international commerce.
Harmonising infrastructure and technical requirements is the essential first step for future-proofing payment networks. Payconiq has worked with leading European payment schemes to redesign their back-end networks, improving flexibility, security and speed, ready for the next generation of development.
The schemes that can most easily integrate and enable the experience that users expect will be able to add more partners, offer new services and retain more business over the long term. PSD2 and open banking were right that everything starts with access– now it’s down to schemes to open their own future.