The European Union (EU) was among the world’s pioneers in open banking regulation, adopting since the late 2000s a series of directives to allow new types of market players to provide payment services alongside credit institutions, ultimately increasing competition and fostering innovation.

These directives triggered the development of open banking services by giving a legal status to account information service providers (AISPs), payment services providers (payment institutions (PIs)), and electronic money services providers (electronic money institutions (EMIs)), and establishing the free access to payments data held by banks.

In France, data from the Autorité de contrôle prudentiel et de résolution (ACPR), the administrative authority that supervises the country’s banking and insurance sectors, show that these regulations have significantly increased competition in the industry.

As of the end of 2021, 62 domestic EMIs and PIs had been authorized by ACPR. Half of them received authorization after 2018, showcasing that the Revised Payment Services Directive (PSD2) has been met with enthusiasm by the industry and has accelerated the pace of change in the financial services sector.

ACPR number of EMIs, PIs and AISPs in France, Source: Autorité de contrôle prudentiel et de résolution, Banque de France, March 2022

Now French paytech companies appear to have started exporting their services aboard, with ACPR stating that in 2021, 43 French EMIs and PIs, and 4 AISPs reported at least one passport within the European Economic Area (EEA). Each of them addressed 19 countries on average, the authority estimates.

New regulations and market changes have also led to an increase in the number of foreign EMIs and PIs operating in France. At the end of 2021, 172 EMIs and 282 PIs declared providing services on the French territory, indicating that foreign competition has substantially increased.

Flow of new EPIs, EMIs and AISPs declaring to have operations in France under the cover of their passporting rights, Source: Autorité de contrôle prudentiel et de résolution, Banque de France, March 2022

Supporting open finance

As intended, PSD2 has resulted in the emergence of agile players, and innovative products for customers. The pressure to open up data is now extending to other areas of the financial sector, calling for adaptations in the regulatory framework to harness the opportunities brought about open finance, all the while, mitigating the risks arising from the trend, says Denis Beau, First Deputy Governor, Banque de France.

“Open finance promises new opportunities and more modern payments,” Beau wrote in a recent contribution for Eurofi, a European think tank dedicated to financial services.

“European authorities have to support this digital transformation of finance in the coming years, while regulating its risks. Embracing the ongoing data-driven revolution proactively is key to move Europe forward as a global digital player.”

Open finance, the next step of the open banking journey, involves enabling third-party providers to access customers’ data across a broader range of financial sectors and products ranging from mortgages and savings, to insurance and consumer credit.

The potential of open finance lies in the ability to gain a better understanding of a customer’s financial situation by having a more comprehensive view of their finances and behaviors, ultimately allowing providers to offer tailored products and better serve them.

For Banque de France’s Beau, open finance “holds great potential to improve customer experience and streamline back-office operations way beyond payments, in areas such as mortgages, securities, or pensions,” offering the prospects of more accessible, efficient and innovative financial services, he said.

But the trend also comes with risks that must be mitigated with proper regulation. For one, open finance will ultimately further lower entry barriers, potentially increasing market concentration. This challenge is particularly acute with bigtechs’ entry into finance. These companies already have significant market power in the areas of cloud computing, mobile payments and digital identification, Beau says, and could misuse their market power to increase user switching costs, exclude potential competitors, and consolidate their position by raising barriers to entry.

Another consideration relates to data privacy and data protection in the wake of increasing data volume in circulation and cross-referencing. Cross-border data flows also complicate the enforcement of regulations and make it more difficult for authorities to act, Beau notes.

The European Commission (EC) is currently working on an open finance framework with hopes for greater data-driven innovation in the financial sector. Building on the progress made with the landmark PSD2, the new legislation will seek to further enhance data sharing and openness across and within sectors. A legislative proposal for the framework is expected for later this year.

Featured image credit: Edited from Unsplash