The EU and the U.K. have passed laws that requires their banks to create application programming interfaces and open those APIs to third-party developers and banks in the U.S. should be aware.
These new laws are paving the way to standardization for open banking which could lead to rapid innovation and a competitive advantage for the European banking system.
These new laws are also more friendly to fintech companies as it streamlines access to a growing network of bank data. Fintechs within the U.S. must create individual data sharing agreements with each bank partner, and the negotiations for each partnership can be resource intensive.
However, in the EU a fintech can get access to all bank APIs through registering as an account information service provider (AISP) or payment initiation service provider (PISP). This could create a situation where the U.S. may lose out on technology investments and see innovative financial professionals leave the nation to work in the rapidly advancing open-banking environment within the EU.
The new European laws will also encourage investment and innovation outside the U.S. by creating standards and reducing uncertainty for smaller tech companies. The EU’s second Payment Services Directive (PSD2) is compelling European banks to create best practices in APIs, vendor integration and data management.
For example, the European Banking Federation has made it clear that they believe the new PSD2 laws require banks to adopt APIs and move away from screen scraping. This interpretation favors companies that create bank APIs like Plaid, which recently said it would be acquired by Visa for over $5 billion.
Plaid has focused on creating a system of interfaces analogous to an open banking highway system by connecting developers and financial institutions using APIs to integrate banks with cutting-edge applications. However, this may put regional and community banks at a disadvantage as screen-scraping technologies are cheaper and have been in place for more than a decade.