Darren Cran, managing director of AccountsIQ explains how open banking will alter the way that accountants and their financial management systems will handle payment processes.
Online and mobile payments have exploded in recent years, bringing some fundamental changes in the way financial transactions are processed. Online transactions typically pass through multiple parties and demand a higher level of in-built security.
In the old days, the big “clearing” banks settled transactions between each other. Even with electronic methods, they relied on bespoke file formats and different methods of exchanging payment and information requests for information and payments, often using their own secure transmission lines.
The new payment services directive (PSD2)
These old school arrangements are not suited to the digital era. The Second Payment Services Directive (PSD2) that came into force in January 2018 was designed to create a common system for handling secure payments across Europe. PSD2 and the open banking interfaces that it relies on now applies to all payments from or within the EU, including the UK, Norway, Iceland and Liechtenstein.
Even though PSD2 was mandated in January, it will take a couple of years to filter through to accountants and their systems. This article explains how open banking is likely to play out for finance professionals.
PSD2 regulates new services such as integrated payment application programming interfaces (APIs), which consumers can use to grant permission to access funds from their banks. As well as requiring banks to support open APIs, the PSD2 regulation lays down stronger authentication processes to protect online transactions against fraud.
PSD2 also applies to account data, so businesses can opt to share their data with authorised third parties, for example to get faster access and better rates on financial services like loans.
What happens under PSD2
The open banking APIs that are being developed to comply with PSD2 will underpin a system of fully integrated peer-to-peer payments. The mechanisms will reach into financial systems, so transactions will only be paid when the purchase order is approved and the invoice is matched. At AccountsIQ we have been working on these processes for some time. Until now, transactions went through a batch process, and then to someone else’s hands.
In contrast to these often informal control arrangements, PSD2 will allow us to automate them the enhanced control environment within these linked systems and bring a new level of security to business payments.
AccountsIQ and cloud financial management systems
AccountsIQ is a web-based financial management system (FMS) that integrate with a large number of banks through secure connections. AccountsIQ is already PSD2-compliant and we are building an OAuth platform, an industry-standard protocol for authorisation and payments execution.
We are building our prototype alongside the Allied Irish Bank (AIB), which means we are an accredited third party provider. This will position us as a payment platform for both domestic and foreign currency payments with access to wholesale rates.
On-premise software may struggle to operate in real time with the open banking environment described here, so moving to the cloud is an essential step to ensure you are PSD2-compliant.