Open Banking offers a future of fast, direct and transparent data flows that can change the way people use and consume financial services. Built around the concept of strong customer authentication, a range of new solutions are possible including specific enablers that can make Request to Pay an everyday reality.
One of the most game changing aspects of Payment Services Directive 2 (PSD2) regulations is the introduction of an Account Information Service Provider (AISP) license. Providing the customer gives consent, this license grants third party providers (TPPs) access to a bank customer’s data and specifically their transaction accounts. From a user perspective, the granting of strong customer authentication is the key enabler that allows a TPP to then offer account insights, conduct credit scores and develop a range of other services for both private people and businesses.
According to Danny Pedersen, Senior Product Manager at Nordea, this Open Banking approach to data based on customer consent offers multiple opportunities for developing new services: “Let’s say I’m a large company looking to partner up with a new supplier. As a potentially strategic supplier, I would like to make a check on their ability to supply on time. With an AISP license, it is possible to envisage a TPP providing a middle layer of a ‘supplier confidence score’ based on strong consent access to the supplier’s transaction data that checks whether their cashflow is in order, if they have enough business coming in or are too dependent on one supplier, etc. That’s just one B2B angle possible with an AISP license. For consumers, I think everything you can dream up regarding having access to a customer’s transaction data and spending patterns is possible.”
The second key TPP license is known as a Payment Initiation Service Providers (PISP) license and gives the TPP the right to initiate a payment transaction from a bank customer’s account based on the end user’s strong consent. This license has direct implications for increasing the scope of Request to Pay (R2P) as the request would be channeled via the TPP on behalf of other parties. Having received the request, the user can confirm with a simple ‘yes’ via a bank ID or similar digital signature, making the process fast and seamless.
Danny Pedersen explains: “A PISP license can be used for making a request to pay in all sorts of situations where we are discussing single payments. According to the PSD2 regulations, every single payment requires a strong authentication. A consent mechanism from the user to make direct debits or recurrent payments is not yet built in. As this refers only to single payments, it’s a request to pay and not a request to keep paying.”
“One example with strong authentication for a single payment could be buying a car. A TPP can provide the car dealer with an instant credit score for the car purchaser and then initiate a payment from their account or provide break-down in installments. The TPP can check that there are sufficient funds in the car purchaser’s account and then initiate a payment. The purchaser then consents to the down payment with a click of the thumb via a bank ID or equivalent and then checks out. There are multiple R2P scenarios you could see happening with PSD2,” adds Danny.
A number of TPPs are already developing aggregation services that will provide users with access to all of their bank’s accounts via a single app or platform. This means that no matter which bank the customer comes from, they will be able to either access and view the transactions and balance on their account or initiate a payment. With the proper license issued by an FSA, the TPP is able to integrate to any bank and thereby become an aggregator.
“In general, life should get better for customers because they will be able to go one place and find an overview of the purchases they have made. Then all they have to do is swipe the requests to pay to complete the transactions.”
Acting as a bridge to personal financial management, aggregation services can also include incentives and recommendations that are presented to the user based on their transaction data.
“If the request to pay is an allocation towards a pre-payment with a merchant, for example a 5,000 deposit to be spent over time with the merchant, the merchant might say you can actually spend 7,000 for the 5,000 you deposit. All sorts of different incentive offerings can be made and I think you’re going to have a new customer journey where this is just a new middle layer in that journey. So when you’re at a web shop making a purchase, you’re being advised along this journey,” notes Danny.
By analysing your purchase behaviour, you might receive a notification that you will most probably save 20% buying now rather than buying in a month due to seasonal price changes for products you have historically purchased.
The scope for making data driven decisions linked to merchant offerings makes personal financial management one of the key areas of interests for service providers.
“How you use the data that becomes available is very interesting. By analysing your purchase behaviour, you might receive a notification that you will most probably save 20% buying now rather than buying in a month due to seasonal price changes for products you have historically purchased. This means that a user can be motivated to act based on the data and hopefully save money. I think a lot of personal financial management is going to be built into the user journey somehow. So I access web shops through my personal financial management app and approve payment requests all in the same place,” says Danny.
With TPPs able to access transactional data, the aim will be to provide personal financial management services that are seamlessly integrated along the complete buying experience through the R2P stage and completion of the transaction. In the future, this might become less of a banking proposition.
“In order for banks to offer competitive alternatives to the personal financial management apps that we expect to see, they will need to move away from the traditional business model of offering their own lending products. Banks will need to disrupt themselves more to become really objective with their recommendations. As they move from the point of saying, ‘this is what you’ve done’ to ‘this is what you you could do’, they need to find a way of doing that without potentially hurting their own earnings,” concludes Danny.