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Open Banking and PSD2 are coming into force over the weekend. Both sets of legislation will change the way the finance industry works across Europe and the UK, and ripples will be felt around the globe.

Although both regulations share a common goal – the opening up of the banking industry for the benefit of customers and clients – there are some key differences between the two.

Open Banking is being spearheaded by the UK’s Competition and Market Authority (CMA), which got the project underway following an investigation into competition within the country’s retail banking sector.

It found that just 3% of customers in the UK switched their banks every year, meaning that many were missing out on better offers, greater choice and the potential benefits of shopping around.

In response, the CMA is forcing nine big banks in the UK to implement open API standards. These will allow third parties secure access to customer current accounts. With this access, trusted parties will be able to gather transaction data or initiate payments on the customer’s behalf.

This, theoretically, means that banking products could be sold outside of the bank’s traditional architecture and infrastructure. A customer could sign up for a loan from NatWest via Google, for example.

Despite being given ample warning, five of the nine largest current account providers in the country will not only miss the deadline, but their customers won’t be able to access Open Banking services for up to a year.

Barclays, Bank of Ireland, RBS and HSBC have been given a “maximum” of six extra weeks by the CMA. Santander-owned Cater Allen, which operates with more than 40,000 corporate accounts, will miss the deadline by a year as it needs to upgrade its underlying infrastructure.

Et tu, PSD2?

The Revised Payments Service Directive, or PSD2, is an EU directive that will enable bank customers, from both the retail and corporate side, to use third-party providers to manage their finances. Conceptualised in 2013 and ratified in late 2016, the time has come (by Saturday, anyway) for governments across Europe to implement the legislation.

PSD2 will introduce two new chess pieces to the bank’s playing board: Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs). Remember the name – they’ll be all banks can talk about through the year.

AISPs can get access to a bank customer’s spending habits and account overview, while PISPs are far more proactive, and can initiate payments on behalf of the user. The latter is surely to bring the biggest competition to the banks – around 9% of payments revenues is expected to be lost to PISPs by 2020.

See more: Consumers will leave EU banks in droves after PSD2

So, what’s the difference? While both pieces of legislation take aim at retail banks, PSD2 also has payment suppliers in its sites. Of course, being a European piece of legislation, PSD2 has a wider scope, and doesn’t just focus on nine large UK banks.

PSD2 will allow third parties from anywhere in Europe to access a customer’s data, as long as they’ve been vetted by the European Commission.

A survey conducted by the Commission found that 80% of EU citizens wouldn’t purchase a financial product in another EU member state, with the main reason being that similar services existed in their home country.

In the words of Commissioner Jonathan Hill: “This legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow.”

Rise of the startups

So, what will the impact be for banks, which have so long relied on hoarding customer data? Well, since a fair few of them aren’t even ready to comply yet, the true change probably won’t be felt for the next few years. Yet there is certainly the smell of change in the air.

“For years banks have sat on the most valuable asset to any business: the infinite transactional and financial data of customers that essentially define individual’s tastes, preferences, budgets and – crucially – their requirements for building and planning their lives,” said Felicia Meyerowitz Singh, co-founder and CEO of cash management firm Akoni Hub.

“With Open Banking, this power will be wrestled from the big incumbents and data will be available to third parties, SMEs and new digital players. This will lead to a better future for financial services, one that increases competition and creates a greater consumer experience.  More businesses will finally have a shot at delivering services that are tailored and relevant to individual customers.”

At the end of it all, the biggest beneficiary is expected to be the customer, who is being dragged (whether they like it or not) into a world of almost limitless choice. Users will be able to pick and choose the banking services they want, without being hidden behind the UI of their home bank’s online portal.

Related: PSD2 confusing consumers as legislation looms

“13 January 2018 may be remembered as the ‘beginning of the end’ of the traditional retail banking industry,” added Lu Zurawski, solutions practice lead for retail banking in EMEA at ACI Worldwide.

“Thanks to a profound set of new rules by European regulators and the UK government, we may see the start of an era where consumers no longer hesitate to change their bank accounts or make more personalised arrangements in regards to their finances.

“In the next few months, we will see new providers offering so-called ‘account aggregation’ services. Those of us with multiple bank accounts will be able to access all of our private financial information in one place, without the need to log into separate applications. These providers are also expected to offer comparison services, showing fees, charges and features of different products. If consumers adopt these new services, our relationship with banks will eventually change.”

To avoid there being an anti-climax when it comes to PSD2, commented Steve Lemon, VP of business development and co-founder of Currencycloud, there needs to be much greater consumer awareness over what PSD2 and open APIs can give them.

by Alex Hamilton
Alex is Senior Reporter at IBS Intelligence, follow him on Twitter or contact him at: alexanderh@ibsintelligence.com