Is PSD2 just an MVP towards true Open Banking?

On January 13, a piece of EU legislation known as the Payment Services Directive (PSD2) came into effect, mandating that banks must make it possible for a third party company to write software through which bank customers can access their accounts and initiate payments. In other words, banks are now required to open up their data to third parties. 

The implementation of PSD2 has given rise to a lot of discussion around Open Banking but a true Open Bank model requires much more than just complying with PSD2. 

Ever since the first draft of PSD2 saw the day of light back in 2015 the industry has been divided over the initiative. 

Some banks see Open Banking at best as a cost and at worst a threat. Not only do they believe that they have to develop the extra IT infrastructure necessary to support third party applications, they also risk losing control over a major part of the user interface, which in today’s digital world makes up a very large part of the Banks’ brand experience. As such, banks in this category will only reluctantly make the PSD2 mandated interfaces available, while at the same time increase the investment in their own proprietary banking portals. 

Other banks are taking the opposite view and see an opportunity in Open Banking initiatives. They believe that openness will lead to increased competition, greater innovation and ultimately better user experience. By opening up and inviting collaboration they can provide this added value without significant additional IT spend and they can better support different client segments. 

It should be no surprise that we at Saxo Bank fall in the latter camp and in many ways we have built our business with this new world of Open Banking in mind. Ever since we signed our first White Label agreement in 2001, we had the vision of achieving a seamless integration between our platform and our clients’ business as core to the success of our partnership. After all, it is rare in any industry for the product manufacturer to have exclusive control over retail distribution. If you want to scale across geographies and across client segments you quickly realise the need to establish local partnerships. Retail businesses are a case in point. You can buy a Hugo Boss shirt at the Hugo Boss brand store, but you can also buy it at Galeries Lafayette in Paris, Saks Fifth Avenue in New York or Amazon. So why should that not be the case in banking? 

Since we established our first white label partnership in 2001 we have gradually but continually increased our openness and integration capabilities. In 2013 we made a strategic decision to develop our new generation of trading platforms in HTML5, only running against a well-documented OpenAPI. Two years later in May 2015, we released our new SaxoTraderGO mobile trading platform, built on the OpenAPI and six months later we officially launched our OpenAPI to select existing and new partners. By doing so we became one of the pioneers of Open Banking. 

Our OpenAPI was pretty comprehensive, exposing all of the functionality necessary to build a complete trading platform, including streaming prices, charts, live updates of account balances, position and order lists, as well - of course - the ability to trade. At the same time the value proposition was very clear. By providing open access to our cloud based ”Banking as a Service” infrastructure, we became more relevant to a larger client base which could deliver a better user experience. For example, by allowing a Chinese introducing broker to develop their own user experience to serve clients in that region we could benefit from the local development talent and understanding of the Chinese market. Likewise by enabling an established Australian money manager to build a simple advisory and information application, we again increased the value of the combined offering. 

In both cases the added value is obvious, and there is a clear way to monetise it. A better, more relevant client experience to a larger client segment leads to increased revenue as a result of increased trading and investment activity. 

It is easy to see however why some banks remains skeptical of Open Banking. While Saxo’s Open Banking offering provides access to trading and investing in global financial markets, most of the PSD2 inspired Open Banking solutions have very limited functionality and therefore it is more difficult to show direct effect on bottom line results. Currently the only thing a PSD2 third party application do is: a) get a list of accounts including transactions and balances and b) initiate a payment. While getting a better overview of your transactions and making it easier to make payments may be valuable to a retail client, it may not be sufficient to evolve into a revenue model which will benefit both the app developer and the bank. 

In that sense, PSD2 is an important step towards "real" Open Banking but not the be-all and end-all. Those who have worked with the startup/FinTech community will be familiar with the Minimal Viable Product (MVP) concept - the smallest product you can put in the market, with the purpose to learn. Instead of working on your business plan for years, trying to analyse your way to the best product, you simply build the MVP, which you can place in the market to get early feedback. In that respect, PSD2 is probably more of an MVP than a full-blown product. 

While PSD2 is often being understood as synonymous with Open Banking, Open Banking is so much more.  Most likely the real opportunities in Open Banking and the real gains to the bottom line will only be materialized, if the current Open Banking proponents start thinking beyond PSD2. Yes customers need to make payments, and maybe by doing so with a better app they can do it a little faster and cheaper. But customers certainly also need access to comprehensive, low-cost, transparent, and easy ways to invest, trade and manage their wealth. This is why a true Open Banking initiative should cater for these needs.

Or maybe – with this first phase of Open Banking underway, it’s time to start talking about Open Wealth?