The European Union, for all its ills, can be seen as a good leading indicator of global regulatory trends. While it is a generalization, the EU’s desire to protect its citizens means that regulations that could seem draconian in more liberal regions are put into place. And, over time, these protective regulations become the norm and pop up in other places. Whether it is individual privacy, the right to be forgotten or open data – Europe leads the way and other places follow.

So it is interesting to look to a new piece of European legislation that came into effect a couple of months ago. The Payment Services Directive (PSD2) is all about the connection of different financial data streams. In particular payments and data services. The idea being that a more level playing field will be created allowing anyone to use customer data to drive innovation and, ultimately, fulfill customer needs.

This move is, like regulations out of the EU in other areas, an example of what will become a global approach. The Europeans tend to be ahead of the rest of the world in developing these rules, and their experiences can be a good lesson for other geographies who will undoubtedly be forced to wrangle the same issues.

The technology barriers

It may come as a surprise (to, likely, almost no one) but banks’ technology footprint tends to be fairly archaic. Banks tend to innovate in the customer-facing aspects of their business but more often than not their core backend systems are monolithic legacy stacks that are the antithesis of open, interoperable or readily integrated. As such, it is actually a difficult challenge for banks to build the level of openness that standards dictate. Indeed, commenting on this very issue, Hans Tesselaar, executive director of Banking Industry Architecture Network (BIAN), a not-for-profit fintech industry body said”

The real challenge for banks is that they have to connect to their complex back office environment before they are able to work on implementing open APIs. This is something that fintechs do not have to do, resulting in a much faster and more efficient integration process than banks… API is a short acronym, so there’s the potential for misconceptions that these interfaces are somehow already ‘packaged up’ behind the scenes, ready to be declared ‘open’ for use. The reality is much more complex, due to banks’ tangled up and archaic core infrastructure.

Standards? You can’t handle the standards

If integration didn’t create enough of a roadblock, we also have the issue that the creation of APIs is largely unregulated and, as such, no standard way of describing a banking API exists. There is no lingua franca that everyone speaks.

While I’ve long been an opponent of standards being introduced too early, given the somewhat artificial acceleration that legislated open-data creates, a corresponding open standard is probably required.

The broader issues around financial data

In the UK, accounting vendor Xero has seen the writing on the wall and is playing an active part in thinking about what open banking means for accounting data. In an interview, Xero’s director of all things banking and Fintech, Edward Berks, shared some thoughts about what open banking means for the future of account and, by extension, the future of all financial service providers.

Berks spends a lot of time talking about the benefit that small businesses get from open banking data. I is worth bearing in mind that Xero was one of the first SMB-focused accounting solutions to integrate bank feeds – back then bank integrations were slow and laborious and hard to get over the line, open banking regulation will change this.

But beyond the banks feeding data to the accounting solutions, there is a return flow of data which, arguably, is going to mean much more in terms of fintech disruption. Berks talks about the credit-decisioning process. At the moment, applying to a bank for credit is a painful process involving the exporting of data and many paper forms. In a world where accounting data flows both ways between banks and the small business, this process can be automated to the point where banks can have automated decisioning processes based on analysis of customer data in real time.

Who monetizes, and who owns the data?

All of these conceptual opportunities are very interesting, but they do bring up an age old question, that of data access and monetization. In Europe, the decision has been made for the ecosystem. Customers own their data and if they want to provide access to that data to a bank, accounting vendors have to allow them to do so without “clipping the ticket.”

In less regulated markets, however (which means everywhere in the world except for Europe), the lines are not so clear and there is a lack of clarity about who owns the data and who has access to it. If we look at the credit decisioning process that Berks references above, there are three obvious parties: the customer, the bank, and the accounting software provider. If the customer is paying for their access to accounting software, one would be forgiven that the default position is that they can offer that data to whomever they like. The reality is somewhat different and accounting software vendors may suggest that, since they provide the platform upon which the accounting data is processed, that the data is, at least to an extent, their own IP.

From this perspective, it would make sense that software vendors would want to monetize the provision of this data to banks, regardless of the fact that all of this data relates to a single entity, the end customer.

Which way is the puck traveling?

You’d have to be brave to suggest anything but the fact that the European model – that of customer data belonging to the customer and available for them to use as they wish – will become the norm going forward. To get to that point, however, there are a few technical hurdles to overcome. integrating financial data into both legacy and newer operational systems is a long, slow process and this “plumbing” aspect of financial data cannot be underestimated.

At the same time, there will no doubt be some positioning by the various parties, all keen to clip the ticket as much, and for as long, as they can. Expect to hear of many examples where arguments arise over access to customer data, caused in part by various parties in this relationship wanting to monetize the flow of that data.

Over time, however, things will resolve. History has shown that openness will become the norm and that any attempts to stop that openness for commercial gain will be quashed quickly. There’s a lot of amazing stuff that you can do once financial data can be moved quickly and easily, I’m looking forward to seeing that day eventuate.

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

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