Open Banking and PSD2

The banking industry continues to evolve at pace, fuelled by innovations in contactless payments, digital banking applications and data security. This is being driven by changing regulatory requirements and consumer demand for services that modernise the way we bank and access information. The disruption is happening across the globe, in nearly every country and continent – and financial institutions face a challenge keeping up.

A digital paradigm shift: Open Banking and PSD2

Open Banking and PSD2 in particular are driving the digital transformation of financial services. The UK and European Union are leading the way in implementing it, with Australia also an early adopter. A digital paradigm shift is happening that will continue to grow, spreading in Asia, Latin America and other regions as regulations and willingness to share data expand.

So, what are PSD2 and Open Banking?

PSD2, or Payment Service Directive 2, is an EU regulation requiring European banks to expose their customer account data and allow third parties to access financial information through open APIs. PSD2 started taking effect in January 2018, but took until December 2020 to fully implement due to security measures in the Regulatory Technical Standard (RTS) and an extended EU deadline for implementing PSD2’s Strong Customer Authentication (SCA). Thus, PSD2 is still new to the banking industry.

Open Banking in the UK and Australia requires financial institutions to provide third-party access to customer account data with secure and open APIs. It’s essentially the modern practice of sharing financial information electronically, securely and only under conditions approved by customers. The UK’s Open Banking initiative took effect on 13 January 2018, aligning with PSD2. Australia’s Open Banking requirements, also known as the Consumer Data Right (CDR), saw all financial institutions comply by July 2020.

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Open Banking is growing

Open Banking revolutionises consumer banking, redefining it as a customer-centric ecosystem of banks and third-party providers. This system is fed by secure APIs that share consumer data with the customer’s consent. Many countries are starting to have a heightened awareness of the benefits of Open Banking, with some regions implementing their own unique forms of Open Banking regulations, while others implement best practices for customer-centric solutions.

The US is also seeing momentum. Many of its banks and financial institutions do business in the EU and are required to comply with Open Banking. The Financial Data Exchange (FDX) is making progress in standardising various digital and Open Banking practices, and many US financial institutions are already collaborating with fintechs. New data privacy laws are also being enacted, making the country’s foundational digital and security architecture more viable to withstand and launch Open Banking.

Overall, Open Banking has many benefits.

Consumers have a clear view of their finances in one centralised place, helping them budget, find deals and shop for products and services. Open Banking also streamlines payments from banking to other services.

Banks can expand their offerings by opening APIs and connecting with other service providers, partners and platforms to integrate services. They can also analyse customer behaviour for more personalised and relevant services.

Fintechs can quickly launch products and services in agile environments to compete and gain market share, expand collaboration with banks to broaden their portfolios, and integrate other platforms for added security.

Should COVID make Open Banking top priority?

Although Open Banking progress differs from region to region, digital transformations and disruptions are taking hold due to the global COVID-19 pandemic. Many industries and organisations have had to pivot to digital platforms and ecosystems that work within an organisational architecture and business strategy. There is no doubt that the pandemic has expedited technology transformations and digitisation and will continue to accelerate the Open Banking conversation.

Research shows there has been a steady increase in the adoption of Open Banking since the start of the pandemic. A study by Open Banking Implementation Entity (OBIE) and Ipsos MORI found that the UK’s small business community is increasingly using Open Banking to help future-proof their business operations, improve resilience, and keep up with the accelerated digital transformation consumers expect, with less face-to-face interaction and streamlined access to digital applications.

The benefits for consumers of being able to tie accounts together and securely access financial information like banking, mortgages and investments in one place, has gained momentum through the pandemic. The key, however, is consumer confidence and buy-in.

What to expect next: considerations for banks

The consumer-friendly changes proposed by Open Banking standards pose both challenges and opportunities for banks. PSD2 and Open Banking will open up the market to new entrants, giving consumers more flexibility and choice on how to manage and spend their money. Digitisation of services will be critical for banks, no matter what region they operate in. Educating consumers on the benefits of sharing data confidently, as well as the value of an enhanced consumer experience, will be crucial for adoption.

Banks must strike a balance that includes:

Enabling frictionless user experiences that combine a transparent, streamlined experience with dashboard-level control over solutions and data preferences

Providing stronger, more restrictive security that can scale and grow in a way that ensures continual regulatory compliance

Adopting a technology strategy that modernises banking platforms through collaboration with third-party providers and fintechs

Investing in innovation that allows them to embrace end-to-end digital architecture

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The Okta solution

Okta helps banks confidently innovate the customer experience through strong identity management and a robust PSD2 and Open Banking solution .

With a world-class identity and access management solution, Okta enables banks to bring customers and employees a frictionless single sign-on experience, while protecting sensitive data with strong, adaptive multi-factor authentication that automates appropriate access across each end user’s lifecycle.

In addition, Okta’s strategic technology partners offer dynamic authorisation governance that extends identity protections to APIs. This provides continual, contextual authorisation at a transactional level, ensuring that APIs, both internal and external, are continuously monitored, and access is assessed based on risk and threat intelligence.

Banks and financial service providers need new tools to safely enable customer-centric Open Banking solutions. Contact us today to learn how we can help you.

About Okta

Okta is the leading independent provider of identity for the enterprise. The Okta Identity Cloud enables organisations to securely connect the right people to the right technologies at the right time. With over 6,500 application integrations, Okta customers can easily and securely use the best technologies for their business. To learn more, visit