One of the core principles of European Union, that of European Single Market, revolves around free movement of goods, capital, services, and labour. In contrast to that, 58 million EU citizens over the age of 15, or about the 11.5% of the total EU population, do not have access to a payment account. At the same time, only 15 million EU citizens, or about 3%, have an account in a member state outside of the one they inhabit.
The above mentioned statistics highlight a commonly known fact about the financial system; regardless of how open the European Commission wants it to be, it is actually circled by numerous moats, so as to retain its national and fragmented status. This status has been established and supported by the national governments in order to nurture national character and was empowered via national laws and regulations. In its current status, each financial institution possesses proprietary knowledge over its customer and the customer has no right to channel this knowledge to another “vendor”, so the lock-in is absolute. On the other hand, no transparency is offered to the customer regarding the reasons behind an acceptance or a rejection of a credit or an account application. Last but not least, the risk averse profile of financial institutions keeps at distance people with poor financial background like youngsters, entrepreneurs, people who might not meet the end of month payments at some point of their life etc.
Europe has taken a number of steps in order to resolve this issue. Legislative work like Payment Service Directive (PSD) in 2007 led to the introduction of SEPA (Single Euro Payments Area), among other things. In 2015 another major step forward was made with the revision of PSD and the introduction of PSD2 that aims to enhance open banking across the entire Europe. PSD2 came in force on January 13th 2018.
In short, PSD2 enables bank customers, both consumers and businesses, to use third-party providers to manage their finances. Banks are obligated to provide these third-party providers access to their customers’ accounts through open APIs. This will enable third-parties to build financial services on top of banks’ data and infrastructure, while banking customers will continue to have their money safely placed in their existing bank accounts.
Although financial institutions have 18 months to implement the standard, a number of competing technical implementations have already been witnessed in the wild. PSD2 implementation can fundamentally change the picture of financial inclusion within European Union.
Financial institutions will get access to new markets, aside from their local ones and their customers will have the ability to pick the best offer out of approximately 5.000 financial institutions around European Union. In this way competition among financial institutions will drive opening up to community segments that used to be excluded, up until now. If this does not happen from the national banks, it will become a reality from financial institutions of other, maybe even smaller, nations or from those banks that are technologically advanced in order to handle risk and are eager to open their customer base.
Such a competitive environment will drive financial institutions to evolve both in terms of processes and in technological terms. It is clear that mighty forces within EU work on shaping a nurturing environment with respect to financial inclusion. A more socially responsible, in terms of financial inclusion open banking is formulated and the result will involve a broader part of the EU community.