February 9, 2017

PSD2 might not be as good as promised. What does this mean for startups?

By this point you’ll know what PSD2 is – and know what it promised to do for fintech startups and third party payment methods. If you don’t look here.


There is, however, a chance the implementation of banks API’s won’t be as frictionless as we’d hoped for. Some in the fintech world have highlighted gaps in the smallprint of PSD2 which would give power to the banks over their API.


These gaps might make it difficult to balance the security and regulatory measures banks demand and the flexibility and convenience these third-party payment platforms seek to allow.


So what would it mean for startups if banks did have the power to slow or delay transaction?


Well, it’s good news for banks, bad news for fintechs.  A limit to how open the new “Open API’s” are could be disastrous for the third-party companies and the apps they create.




As the UK Treasury found in 2014, if a completely open API were not forced on all banks it could make consumer and SME banking markets considerably less competitive in the face of up and coming FinTech startups.


Without changing the current practise of information asymmetry, the fintech industry will remain in a situation where banks can create barriers to competing financial products. Banks might be able to lock the customers into more convenient gateway products, or hide their customers creditworthiness to other potential lenders.


For startups and businesses counting on this providing an easily accessible API, legislation that does not require banks to cooperate would have a huge impact on their capacity to grow.


The convenient use of payment methods and other financial services for consumers using third-party interfaces would be significantly hindered. The speed, convenience and integration of bank and fintech business software would certainly be damaged.


If banks were able to influence the legislation in such a way that they were not required to cooperate fully with third-party API requests, and hinder third party services, it would be easy for them to convince consumers to opt with artificially faster products, rather than third party applications.




With banks often failing to keep pace with developments like integration into new hardware like smartphones and voice-tech, it has been down to fintech startups to introduce these innovations to the finance sector.


Third party apps have enabled a host of innovative tech – from robo-advisers and mobile transfers to cheaper money transfers financial services. Seamless integration into existing banks API’s offers a fantastic opportunity to bring much of this innovation to customers using traditional banks. This, however, requires easy and quick access to the API of banks to process payments and transfers quickly and conveniently.


Without access, or at lower speed, the utility which these platforms provide would be very limited.


This step to limit the access of third-party apps could halt the progress of startup technology as banks lock in existing customers. If this legislation does limit the scope of Open Banking, then fintech firms could find it difficult to sell services to the existing customers of large banks.



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