Open banking PSD2 in UK

Since the Second Payment Services Directive, commonly known as PSD2, has been adopted across European countries, this directive has been considered one of the crucial legislation for the UK and taken into account alongside other regulatory frameworks of financial services. Today, the UK is the powerhouse regarding financial innovations and the development of open banking in Europe.

What exactly is open banking PSD2?

The Second Payment Services Directive, commonly known as PSD2,  is the updated version of the original Payment Services Directive that came into force in January 2018. This legislation regulates the payments industry in countries within the European Union and the European Economic Area, including the UK, and aims to boost innovation and competition and upgrade customer protection and security. Essentially, PSD2, through the implementation of open banking, eliminates banks‘ monopoly on their consumers’ financial data and demands to share this data with other financial service providers, such as fintech companies or other financial institutions.  

Why does open banking PSD2 matter? 

Since PSD2 has entered into the regulatory framework of the banking industry, this directive has been changing financial services in the UK prominently. As already mentioned above, open banking PSD2 in the UK ensures that consumers have the right to share their financial information with businesses and organizations that deliver upgraded services regarding their financial data. Specifically, PSD2 allows third-party financial services providers authorized as Account Information Service Providers, or AISPs, and Payment Initiation Service Providers, or PISPs, to access financial data held by banks if permitted by consumers. AISPs can aggregate and display consumers’ data from all their accounts that are held in multiple banks. Also, PISPs can initiate payments by filling in the information needed for the bank transfer and informing both the consumer and vendor of the transaction on behalf of the consumer. Through these additional services provided by AISPs and PISPs, consumers can save time due to faster banking processes and get a convenient and easily understandable overview of their financial information, such as account balance, ongoing transactions, credit scores, etc. In turn, consumers can make more intelligent decisions on their funds, while financial services providers can provide more suitable offerings for their clients. Also, due to PSD2, banks in the UK provide consumers with new security requirements that demand more secure identity checks when paying online. All in all, PSD2, through open banking, allows financial institutions in the UK to offer new technological developments, upgraded financial services and better consumer experience.

How did the UK become one of the leading developers of open banking?

Under PSD2, interactions between banks and third-party providers are available due to Application Programming Interfaces, commonly known as APIs, which provide a method for financial services providers to connect and facilitate the transfer of data and many operational processes. Banks and fintech companies in the UK implemented new rules set by PSD2 and became one of the leading developers mainly due to their API specifications, which differ from other European countries’ API features. Specifically, API requirements for open banking in the UK are available in great technical detail and can be applied with a more flexible approach. Also, before the adoption of PSD2, financial institutions in the UK had already developed their APIs. In turn, these companies in the UK were able to provide advanced open finance strategies immediately from the onset of the new banking era set by directive. 

What is the impact of Brexit?

Even if the UK withdrew from the European Union on the 1st of January 2020, PSD2 will likely apply to banks and fintech companies in the post-Brexit UK, as compliance with PSD2 is inevitable to interact with other European financial institutions and to remain competitive in the banking industry.

Posted in: Personal Finance

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