It is impossible to overstate the influence that the Payments Services Directive 2 (PSD2) has had on financial institutions throughout Europe. PSD2, a directive by the European Parliament, fundamentally facilitates third-party data exchange between financial institutions, payment processors, and other organizations, enabling the development of new products and the enhancement of consumer experiences.

The market in the US has promoted Open Banking, or third-party data exchange between financial services companies, in an effort to match the level of innovation observed in the EU.

Open Banking has not only developed but also "exploded" since its launch in 2018, according to Andy Wiggan, chief product officer of GoCardless.

"It's amazing how far we've come that, from introducing 'Open Banking' as a theoretical concept in 2016, one in seven digitally active UK consumers has used the technology today," he adds.

PSD2 has strengthened uniform security protocols amongst data-sharing parties in addition to introducing API standardization to facilitate data transfers.

In order to lower fraud and improve the security of online financial transactions, it also demands strong customer authentication (SCA), which calls for two forms of consumer authentication.

"Open Banking operated within constraints and relied heavily on screen scraping—or collecting data from one application and translating it to another—done by Third-Party Providers (TPPs) to access financial data,” says Raouf Mhenni, Chief Commercial Officer at Sopra Banking Software.

"This gave consumers little control over their data in addition to being unreliable and unsecure. Not to add, it didn't really promote innovation.

The innovation that followed in the next six years is the one that customers have noticed and experienced the most.

Open Banking has resulted in "smarter and more meaningful digital experiences, putting consumers at the center of where and how their data is used," according to Bart Willaert, EVP of Open Banking International Markets at Mastercard.

"PSD2 introduces a way for banks to seamlessly connect and exchange data," continues Mhenni. This enables users to accomplish more with less switching between accounts and applications by combining all of their financial data into one place.

Pay-by-bank, for example, is becoming more popular. This allows users to safely make online payments straight from their bank account. This would not be feasible without PSD2.

Additionally, Open Banking's scope and appeal are only going to grow. Willaert references a Forrester study that projects that by 2027, there would be twice as many Open Banking customers in Europe as there were in 2022.

Wiggan thinks we're still in the "early days" of using Open Banking because of its potential for development, especially in light of the new regulations and innovations being implemented to spur its expansion.

"Payers can experience the benefits across even more use cases with the 'Phase I' rollout of commercial Variable Recurring Payments (VRPs), due to start later this year," adds Wiggan. "For instance, VRPs can assist customers in transferring funds between their preferred investment and savings apps or making recurring charitable donations."

PSD3: Enhancing Open Banking to Promote Wider Adoption

Indeed, the third Payments Services Directive (PSD3) of the EU, which is scheduled to take effect in 2026, will undoubtedly contribute to the notable growth of open banking.

"PSD3, along with its counterpart Payment Service Regulation (PSR), will standardize Open Banking expectations and practices across the financial services industry in a way that PSD2 has not," according to Mhenni, even if PSD3 is not as revolutionary as PSD2.

He writes, "Unlike the different approaches that have been implemented from country to country under PSD2, PSD3 promises to enforce uniform Open Banking processes across all European countries."

"Whereas PSD2 allowed some leeway for interpretation on how each nation implemented Open Banking, PSD3 imposes more oversight and imposes sanctions for non-compliance.”

Furthermore, PSD3 would do away with PSD2's requirement for secondary "fallback interfaces," which serve as a safety net for institutions in the event that their primary data APIs are unable to adequately support Open Banking.

According to Mhenni, "This is a huge step in incentivizing banks to move forward with large-scale digitisation initiatives and shed the legacy infrastructures that they've been holding onto for years."

Additional regulatory enhancements for PSD3 are anticipated in the area of Strong Customer Authentication (SCA), allowing customers to perform necessary security updates every 180 days as compared to every 90 days under PSD2.

Open banking has an endless future after PSD3.

Of fact, PSD3 just addresses payments; other projects, such as Financial Data Access (FIDA), appear to expand the scope of EU efforts to hasten the transition to Open Banking throughout the continent by extending comparable regulations to the savings, investments, and insurance sectors.

"FIDA will bring new opportunities for the whole financial ecosystem," writes Willaert. "It will improve consumer protection, foster innovation and competition in the financial services industry, and open access to a wider range of financial data."

"Although there are a ton of framework opportunities, we still need entrepreneurs to develop new goods and services, and we also need consumers to believe that new technology is safe, secure, and valuable.

Payments account data has taken years to become ready for general product and service value-adding. Therefore, we need to collaborate to develop the initial use cases and then expand from there.

"The true value lies in the cross-vertical use cases; for instance, a loan plus insurance plus payment could really ease the process and simplify life for a buyer of a house or car."

Because of this, it's possible that open banking won't even be open in the future. Yes, it will, but "banking" may also refer to a much broader network of related services that combine a customer's needs for goods, services, and apps into a single platform.

Willaert states, "We're moving away from just Open Banking to Open Finance and Smart Data." Businesses of all stripes will be able to provide platform banking and Banking-as-a-Service (BaaS) capabilities thanks to open finance, which it currently does.

To improve the customer experience, banks include goods and services from the wider financial ecosystem into their offers in this way, according to Mhenni.

He goes on, "These business models leverage Open Banking to build experiences that are similar to super apps in that they combine standard banking services with more lifestyle-focused offerings like rewards, insurance, and travel perks—all in one location.

"Open finance is becoming more popular outside of traditional banking." Open Banking is being used by non-banking entities such as insurance, telecom, and energy suppliers in order to improve customer service and obtain more insights.

"With a deeper understanding of their customers, companies can make targeted improvements that create effective, and enjoyable, digital experiences," says Laura Friend, UK Enterprise Lead at Amplitude, in closing.

Users want a smooth, quick experience whether transferring money, checking their credit score, or making loan payments—even if it necessitates switching between several programs and services.