The European Commission has looked to ease concerns that rules on third-party account access under the revised Payment Services Directive (PSD2) could hand too much power to a small number of fintechs.
Regulatory technical standards set to take effect next September will require that banks provide a “fallback” option allowing access by third-party providers (TPPs) via the customer’s online banking interface, unless they have obtained an exemption from doing so from their national regulator.
To gain that exemption, the standards state that the main interface — typically an API — would have undergone six months of market testing that is “to the satisfaction” of third parties.
That prompted concerns in the banking industry that a single disgruntled TPP could effectively force banks to develop a costly and burdensome technical solution.
“If the majority are happy we would still have to grant the exemption, I would say,” said Gijs Boudewijn, chairperson of the European Banking Federation, at last week’s European Payments Summit in The Hague.
“Otherwise, you can’t be dependent on just one single TPP saying ‘I am not happy’ and thus there is no market acceptance.”
He said that national regulators would need to adopt a “pragmatic approach” to ensure that is not the case.
Ralf Jacob, head of the European Commission’s payments unit, admitted that industry insiders had frequently made that argument.
He suggested in response that a diplomatic approach across the industry and involving national regulators should negate the need for a rules-based solution.
“I think there are ways of dealing with that in a pragmatic way, even by talking to this particular TPP and trying to understand what the problem really is,” he said.
The fallback access mechanism was itself the result of compromise between different industry factions, after existing third parties raised fears that total reliance on APIs could give banks an opportunity to restrict potential competitors.
But Jacob played down the likelihood of the commission overruling a national regulator’s decision to grant an exemption from providing that fallback option.
“Ultimately it is the national competent authority’s decision, but under scrutiny by the European Commission as guardian of the treaties and the EU legislation,” he said.
“So we could in an extreme case say to the national competent authority ‘you should not have accepted this API’, but in most cases I think we can come to some kind of reasonable agreement which satisfies most TPPs and the few outliers that must also be able to align with them,” said Ralf Jacob of the European Commission.
He added that it is likely the incumbent third parties, many of which have been vocal in their criticism of banks’ API strategies, that would be the most “difficult to satisfy”.
Those firms have typically invested in screen scraping, a practice whereby a consumer shares their bank login details with a TPP which then aggregates data and initiates payments on their behalf.
The technical standards would place restrictions on that practice, pressuring third parties to change how they operate, whereas new market entrants could benefit from “even a bad API”.
“I don’t really expect anyone to complain if the incumbent TPPs are happy with the APIs,” Jacob added.
One of the demands placed on banks by the technical standards is that their interfaces create the conditions for “unhampered competition” from potential rivals.
James Whittle, director of international standards and services at the UK’s New Payments Systems Operator and a member of the EU-level API Evaluation Group, emphasised the commercial need for these issues to be settled quickly.
“The worst possible option as far as I’m concerned would be that a firm invests in [an API] only to find out at some point further down the line that they’re not going to get the exemption,” said James Whittle of the New Payments Systems Operator.
Whittle said: “What we need to be crystal clear about is as a firm today, as an [account servicing payment services provider] firm, you have a choice to make about which route do you want to travel down.
“And you need to make that choice now. It’s not something you can delay because there’s a lot of work to be done.”
The provisions on interface testing take effect six months before the rest of the technical standards, so that an exemption from providing a fallback could be granted as soon as the September 14 deadline arrives.
However, that means the banking sector now has less than a year to provide an interface ready for market testing.
There have been signs that banks in certain jurisdictions have recognised this dilemma and plumped for the safe option of only instituting the fallback option.
Other observers have recommended that banks develop the fallback option either way, in case they are unable to obtain an exemption in time — but Boudewijn warned that could prove surprisingly demanding from a technical perspective.
“You should not underestimate the complexity of building the fallback, it’s not a piece of cake,” he said. “It’s pretty complex in itself; it really is quite an effort.”