While it sounds like R2D2’s slightly disappointing cousin, PSD2 (or the Payment Services Directive 2) is set to herald a new era in FinTech innovation.
AccountingWEB members will have definitely heard the acronym PSD2 being bandied around. Its use is often swiftly followed by the phrase ‘open banking’. The reasons why it’s such a buzzword are two-fold: one is that it’s an enormous commercial opportunity for a whole slew of new operators and products.
Secondly, and perhaps more importantly, PSD2’s will break down the banks' monopoly on their user’s data. That’s a big deal. Basically, PSD2 will allow third parties -- with your permission, of course -- to retrieve your account data from your bank. Banks will provide access to accounts via Application Programming Interfaces (APIs).
This comes into effect in January 2018. Although PSD2 is an EU-led initiative Brexit won’t change anything, as the banks will continue to trade across Europe and it wouldn’t make sense for them to not adopt the directive.
“The regulatory technical standards (RTS) will come a little later in 2018,” explains Damian Burke, a partner at 4most, a specialist finance risk consultancy. “It’s only after the RTS comes that enforcement action can be taken. But we’re already seeing banks share data through the APIs in preparation.”
This is where PSD2’s bedfellow open banking comes in: as Burke says, the high street banks have already started allowing third-party integration. It could be seen as a pre-emptive strike against the rising tide of challenger banks now emerging like Monzo and Starling.
For consumers and businesses, Burke explains, it means choice. “Customers can benefit, definitely. Not just from more competitive pricing because more organisations will have a clearer picture of their risk profile, but also new products.”
Our hunch is that the sharing of transaction data will open a whole bunch of use cases, some of which haven’t even been thought of yet.”
Burke’s nod to new products is important. This isn’t just a tussle between high-street banks and challenger banks. All manner of startups have started to pop up, hoping to capitalise on the data gold rush.
Caroline Plumb is one such entrepreneur. She is the founder of Fluidly, an “intelligent cashflow engine”. Plumb’s startup -- which has just closed a £2m funding round -- is constructing a system of intelligence which feeds off accounting and bank data.
“It wraps itself around a business's finances and then uses machine learning, data and financial modelling to predict the future and help optimise and protect their finances,” Plumb explains.
It’s made possible by data, Plumb says, and PSD2 and open banking will create a fresh data set for Fluidly’s AI to feed on. For example, they’re working on a functionality that will allow AI to continuously monitor your business’s transaction data, checking for unusual patterns and alerting you to anomalies.
“We already see accounting becoming real-time: automatic reconciliation, live bank feeds, machine learning - your accounting package will be a live picture. So then the question is: So what? How do I look forward? If my data is real-time, then my forecasting should be as well,” says Plumb.
“With the move towards open banking, you can take control of your data and get value from it. At its heart, it's letting consumers own their data.”
For the banks, it will be a big shift. “The key losers in this are the high street banks,” says 4Most’s Burke. “They’ve been hoarding data for many years.”
However, Burke stresses that it’s not an existential crisis. The banks are enormous and they will endure, but old dogs will need to learn new tricks.
The bigger question for Burke is whether banks will behave responsibly and build trust with application developers. And then, if yes, businesses will need to have their wits about them. “The more information you share, the more you have to recognise that different organisations will have different interpretations of that information,” he says.
A finance director will be able to pick and choose the tools they need to enhance their strategic capabilities. From the looks of the market, they’ll be spoilt for choice.
“At the moment you might deal with one bank, but the playing field will become more complex. And having more data is great, but you can still build flawed models off that data.”
But alongside the risks, the promise is certainly there. A finance director will be able to pick and choose the tools they need to enhance their strategic capabilities. From the looks of the market, they’ll be spoilt for choice.
Whether it’s in forecasting and management of cashflow, like Fluidly’s offering, all the way through to automated credit comparison and new credit modelling services. 4Most’s Burke envisions point-of-sale systems that will allow you to give a customer the choice of how to pay at the point of sale.
The breadth of possibility is why Nesta, a London-based innovation foundation launched the Open Up Challenge, a £5m prize fund for startups working with open banking APIs. Fluidly is one of the 20 businesses taking part.
“There’s a big change coming in how UK small businesses manage their financial lives,” says Nesta’s Harry Atkinson, the entrant manager of the Open Up Challenge. But, he adds, there needs to be perspective. “It’s important with open banking to remember it’s a means to an end. The open banking API in 2018 will enable small businesses to efficiently and securely share data with third parties. And that’s it.
“That said, our hunch is that the sharing of transaction data will open a whole bunch of use cases, some of which haven’t even been thought of yet.”
Contained within Open Up’s 20 challengers alone, you can see a great amount of diversity. There are businesses involved in credit profiling through to working capital management, accessing debt finance, analytics, and accountancy integrations.
The big context to all this product innovation is open banking. “The shift in the regulation is the prompt for all of this. But things won’t change overnight,” says Atkinson. “Open banking creates a pathway to the mountain, but the FinTechs still need to scale it.”