Consumers in the EU are changing the way they shop, accelerated by Covid-19. More broadly, we see a shift away from traditional routes of payment thanks to the rise of new payment products and services and open banking.
The objective of the second European Payment Services Directive, PSD2, was to bring a lot of benefits, such as more online banking and payment options, allowing consumers to take advantage of new products and better services and more secure payments, in order to take greater control of their finances. However, PSD2 has thus far fallen short in breaking down barriers to entry to enable consumers’ full choice. The lock-in effects by banks are still real. The barriers to entry that innovative challenger firms faced before PSD2 largely still exist today. The irony is that PSD2 has even limited the scope of data that Third Party Providers (TPP), such as Klarna, can access. TPPs ensure simplified and smooth online transactions. Other challenges also remain, arising from diverging approaches across Member States in PSD2 implementation.
Incentives for open banking are not strong enough
One of the issues is that PSD2 hasn't been consistently implemented by all banks. This has also caused some shortcomings. In practice, some banks fence off competitors, there is poor compliance with the requirements in the PSD2, and many actively discourage their customers from using payment services from TPPs. There are several banks where their adoption of PSD2 application programming interfaces (APIs) work really well. However, we have seen examples of banks who still have limited or poor access to bank´s customer data via PSD2 APIs, and we still face a multitude of legal obstacles for the provision of TPP’s payment services, such as IBAN discrimination and unexpected late payment cancellations. Inconsistent implementation and lack of enforcement by local authorities is detrimental to consumers who should instead be reaping the benefits of new, and innovative service offerings. Instead, we need a more consistent approach across Europe.
There are very few examples where penalties or sanctions have been placed on banks despite that they have potentially breached provisions in PSD2 or the corresponding regulatory technical standards. Thus, there is no additional incentive for banks to comply with the regulations in time, after the NCA has pointed out the deficiency. This is aggravated by the fact that there appears to be little collaboration between national competent authorities and the European Banking Authority (EBA). We believe EBA should be given more influence to ensure a more harmonised approach across the EU.
Due to these developments we have seen that the user experience is often worsened, containing more steps and clicks for the customers to go through than what they would be required to in their online banking portal. This is negative for customers and for competition, since it makes Klarna´s payment services less attractive in comparison to the banks’ own services. These artificial barriers lead to consumers thinking TPPs have nothing better to offer, that Klarna is failing consumers, and the system is failing them. This gives banks free reign to effectively lock out TPPs, and lock in consumers, without having to keep up with innovation, cheaper, and better solutions, which would be the case in a fair competition market.
PSD2 reboot to make Open Banking truly open
The European Commission is now reviewing PSD2 to understand its effects and shortcomings. PSD2’s purpose was to promote security, innovation, fair competition and consistent application in the EU for the payment services industry. In order to better achieve these objectives, the PSD2 must become more outcome-driven and consumer focused - i.e. identify certain objectives and targets first and support achievements of those targets by stakeholders.
What do we mean by outcome-driven regulation? One example could be to force banks to provide good user experience and customer journeys via dedicated interfaces, and require minimal friction. But in order to deliver real value to EU consumers, the European Commission should start by amending PSD2 to grant the same access to a TPP as a human interface if the bank API is down or does not work.
Together with a new Open Finance Framework, the EU has a huge opportunity to redesign a regulatory environment that enables EU fintechs to compete, innovate, and deliver maximum value for EU consumers, not by locking them in by banks.
Our suggestion: Data mobility, free of charge and easily done, should become readily available for all consumers. This should be the core of the PSD2 reboot. It will allow fierce competition to create the new and innovative services needed to deliver the best outcomes for consumers and society. It will break the dominance of the traditional banks in Europe and allow for new and innovative services. Although proposed in both GDPR and PSD2, in reality data mobility has not materialised. The upcoming PSD2 review should deliver on its promise to enable greater data sharing among banks. This will put the power back with the EU consumer and will drive competition and innovation.
If you would like to learn more about Klarna’s perspectives on Open Banking and the upcoming PSD2 review contact global.pa@klarna.com.