Around the world, people are making the move to an even more digital era; events are planned online, businesses hold meetings over zoom, phone apps can handle any number of traditionally in-person errands.
And the world of finance is no exception. In fact, it’s one of the sectors that’s arguably at the forefront of the online movement.
That’s especially true in Europe, where open banking has revolutionized the world of digital finance. (See our compilation of statistics on the popularity of open banking in Europe here).
As open banking continues growing in popularity across the globe, we wanted to take a minute to look at its place in Europe, where it got its start.
First, before examining how open banking works in Europe, it’s important to understand what open banking is. In simple terms, open banking is the practice of open sharing of a user’s financial data between verified entities with the user’s consent (that part is key – no consent, no sharing).
Take, for example, the process of applying for a loan under open banking, which is one of the most common ways open banking is put into practice. An applicant no longer has to gather physical documents and bring them to a lender to prove their financial history. Instead, they simply log into their bank account as part of the loan application process and consent to share their financial data with the lender.
Then, the lender will connect with the applicant’s bank using APIs, and the bank will share the applicant’s financial data, including financial transactions, amounts, account user information and more. This gives lenders a much clearer understanding of the applicant's financial history and creditworthiness. Meanwhile, it gives the user or applicant the assurance that any loan offer they receive will be personalized to their specific financial situation.
Though open banking has been around in various forms for years, the version of open banking that we know today was made more possible under PSD2 (Payment Services Directive 2). PSD2 was legislation put into effect in 2018 by the European Parliament which helped establish a regulatory framework for open banking. In addition to allowing Third Party Providers (TPPs) like lenders access to consumer data, the legislation established anti-fraud measures and required customer consent to share that data. The act of sharing data and the privacy measures around it are all strictly regulated by individual financial entities in each country in Europe, as well as by the European Banking Authority overall. Check out more about how open banking is regulated here.
The future of open banking is still to be determined, but experts have been theorizing about what it could look like in Europe. This is especially true after last summer, when the European Commission sought comments from experts on what is needed with PSD2, and what could be improved. Though they are still discussing the potential of PSD3, many experts say we could be seeing the next iteration of those regulations in the future with PSD3. Industry officials say it could include things like strengthened customer authentication, even more fraud protection, and more stringent regulations around APIs
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