Last month, the European Banking Authority (EBA) published a response to the European Commission’s call for advice on the upcoming review of the revised Payment Services Directive (PSD2).
The 490 items contained within the document include several proposals that attend to the issue of application programming interface (API) fragmentation.
According to the EBA, “The experience acquired in the implementation of the PSD2 has shown that the absence of a single API standard has led to the emergence of different API solutions across the EU.”
The report further noted: “This creates significant challenges for TPPs [third-party service providers] as they have to invest significant efforts into connecting to different ASPSPs’ [Account Servicing Payment Service Providers’] APIs and adapting their connections to changes of APIs across time.”
Cutting through all the jargon, the EBA argues that API standardization is needed to reduce the barriers to entry for FinTechs wanting to access financial account data held by banks and similar institutions.
In an interview with Gijs Boudewijn, general manager at the Dutch Payments Association, on the topic of the upcoming PSD2 review, he echoed similar comments to what the EBA said on the need for Europe-wide API standards.
Of the original PSD2 legislation, he said, “There wasn’t enough standardization for what was called for in the law, […] there were too many different APIs and the quality of the many APIs that banks produced was not good enough.”
That the EBA is requesting a legal mandate for common API standards is hardly surprising. If PSD3 is to hail the long-awaited dawn of open finance, such a mandate is badly needed.
But Boudewijn raised another issue that illuminates a shift in banks’ attitudes between 2013 and the present. As he observed, because PSD2 requires banks to provide third parties access to account data for free, there was initially no incentive for them to build good APIs.
Watch the interview: Dutch Payments Association GM Says ‘Positive Friction’ Will Protect BNPL Users
But much has changed since 2013. How financial institutions of all kinds can benefit from open APIs has become increasingly apparent and banks have transitioned from an initial belligerence to a more cooperative stance.
Instead of seeing open banking as a compliance issue and third-party providers as a threat, European Union banks now recognize the opportunity that data-sharing and open APIs present. Many now offer developers portals and software development kits (SDKs) to complement their open APIs. Banks appear to have accepted that impeding third parties will ultimately make their own offering less attractive.
There are plenty of examples of legacy banks that have benefited from the explosion in open banking innovation. Many financial institutions (FIs) have tapped startups that specialize in open banking to help provide the services customers want without having to start from scratch.
For example, BNP Paribas’ Italian arm Banca Nazionale del Lavoro (BNL) partnered with Tink to build new features into its mobile app, through which BNL customers can pull data from their other bank accounts and see all their balances in one place.
Other banks have opted to forge their own path. Intesa Sanpaolo is especially noteworthy for its “Smarthub” open APIs, which help businesses manage and monitor their own transactions.
Long before the PSD3 consultation, market initiatives emerged to create their own API standards, but except for the Berlin Group’s NextGenPSD2 initiative, these have been limited in scope to the national level.
EU-wide coordination of the standard-setting process has the potential to realize a better system for all. As stakeholders like the EBA gather to advise and agree on the coming legislation, the bloc once again has the chance to set the agenda for open banking on the international stage.
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