By OTHMAN ABDULLAH / Pic By MUHD AMIN NAHARUL
The Second Payment Services Directive (PSD2) came into force in January 2018 to regulate payment services and payment service providers through-out the European Union (EU) and European Economic Area.
It aims to better protect consumers and promote the development and use of innovative online and mobile payments through open Application Programme Interfaces (APIs). APIs are a set of standard software codes for systems to communicate with one another.
One of the salient features of PSD2 is the provision for third-party systems to access to customers’ bank accounts. Third-party payment providers shall initiate online payments directly from the payer’s bank account. Third-party systems will connect to banks’ system via standard APIs. In order to comply with PSD2 requirements, banks in the EU will have to publish a set of APIs for any third party to access banks’ data.
PSD2 provides a great opportunity for financial technology (fintech) companies providing innovative payment solutions. For customers, the payment process will be more convenient. With competitions, it will also lower payment fees.
PSD2 is a great example of promoting collaborations between fintech companies and traditional financial service providers by leveraging on API technologies. Indeed, banking APIs are the way forward to encourage financial services innovations through the synergy between young and innovative fintech companies with more matured and established traditional financial institutions.
Talent, Budget Challenges
Traditional Islamic financial institutions (IFIs) are generally more constrained in talent pools and budget compared to more established conventional financial institutions. Such constraints might hinder innovations and this could be addressed through collaboration with fintech companies. However, fintech companies must be able to access financial institutions’ data.
Financial services innovations typically require access to banking information such as customer details, account balances, transaction history, product information, debt servicing behaviour and prevailing rates. For example, fintech innovations to compute customers’ net worth would require access to customers’ assets (deposits and investments) and liabilities (financing) information in which the data could be at various financial institutions.
Fintech innovations to recommend financial products would require products and prevailing rates information of various financial institutions. Fintech innovations to calculate credit score would require customers’ demographic details, accounts information and debt servicing behaviours.
While financial institutions may publish products and rates information to the public, customer accounts data will not be accessible by any external system unless they are granted specific access by the institutions hosting the data. In order to get the access, the external system will have to comply to each individual institution’s standard and this can be very costly.
To illustrate simple terms, let’s assume Ahmad is from Malaysia and he needs to do business with three companies in China, India and the Philippines. These companies only speak Mandarin, Tamil and Tagalog respectively. In order for Ahmad to communicate with these companies, Ahmad has to speak Mandarin, Tamil and Tagalog. That can be quite a challenge. However, if Ahmad and all the three companies are able to speak English, they can communicate using a common language — thus eliminating the barriers.
Common language for systems to communicate with one another is through standard or common APIs. If the financial services industry could establish standard APIs, the communication between the organisations’
systems will be more manageable. It would not only benefit fintech companies that would like to access the required data, the financial institutions could also collaborate with one another more effectively.
However, traditional financial institutions may be reluctant to permit external parties to access their data. This is where regulatory bodies could play significant roles in establishing the standard and the rules that every player in the ecosystem must comply with, just like the PSD2 administered by the European Commission.
In summary, in acknowledging the constraints of traditional IFIs in their products and services innovations, the promoters of Islamic financial services should seriously encourage collaborations between fintech companies and traditional providers.
To innovate, fintech companies need to access financial institutions’ data, which is impossible unless they are granted access by the respective IFIs. Accessing various traditional IFIs’ systems can be very costly without going through standard APIs. Regulators could play significant roles in facilitating the collaborations akin to PSD2 implementation in the EU.
- Othman Abdullah is the CEO for Islamic banking and innovative services delivery at Silverlake Sprints Sdn Bhd, a unit of the Malaysian-based Silverlake Group.