Credit Cards came into being around 1950 and they have since become the alternative payment method of choice, particularly online. However, developments in the EU (and UK) over the past few years have sown the seeds of a powerful and user-friendly alternative to cards, for making payments online. These developments are commonly known as Open Banking and are in effect the regulatory and technical requirements to facilitate third-party access to individual bank accounts, to view statement information, and initiate payments. They were enshrined in law as a result of the second EU Payments & Services Directive (PSD2). The idea is that ‘tech companies’ could use this Open Banking environment to facilitate direct payments from a user’s bank account to a merchant’s bank account, in real-time – thereby enabling the e-commerce use case. Open Banking is being rolled out all over Europe and we here at NoFrixion can help your business reap the rewards. Meanwhile, let’s take a look back at how we got there. For the history buffs, this is the abbreviated story of online payments!
1980: Screen Test Initiation of German Federal Post Office
The German Federal Post Office conducted an experiment with five external computers and approximately 2,000 users were invited to participate. The main purpose of the experiment was to test their new online banking service. Users could also make online transfers with the code of “300#”. As a result of the experiment, the very first self-banking machine was developed. This innovation was followed up by the development of HBCI (Home Banking Computer Interface) in 1998 and Financial Transaction Services in 2002.
1998 – 2002: The Innovation of HBCI and FinTs
Home Banking Computer Interface was developed in Germany in 1998. It is an open customer self-service system and electronic payment platform. Thanks to HBCI, signature cards and a banking security system with a personal identification number were developed via FinTS (Financial Transaction Services). Similarly, a single-use transaction authentication number was developed as a second level of authorization. This was aimed to prevent fraudulent activities via the identification of the user.
2004: SOFORT Initiative
After HBCI, collecting data to provide login details became significantly revolutionized, and with this innovation, the SOFORT initiative began. After the customer logs into the platform, a service provider would perform all the upcoming actions until the transaction was completed. Although collecting data was innovative, systems that are more secure were needed.
The first Payments Services Directive (PSD1) was innovated by the European Commission in 2007, to enhance the quality of services in the finance sector. With this directive, a payment service provider was developed as a new industry category. Also, this regulatory framework permitted the execution of financial transactions for non-banking firms. This directive required more transparent transactions and implementations. Thanks to PSD1, the Fintech sector grew with more capabilities and opportunities. As a result, SEPA as a payment initiative was launched in the EU.
2009: Competition of Giropay
Giropay, a German digital payment service, sued SOFORT for unfair competition and security damage of online banking. However, The European Cartel Office responded to these allegations to prevent discrimination against competitors who operated independently outside of traditional banks. This set the scene for the EU’s determination to prevent monopolies and cartels in the finance sector.
2018: Implementation of PSD2
API access for authorised third parties was improved in PSD2. It enables 2 types of payment service providers – AISP and PISP. Account Information Service Providers (AISP) are authorised to access account data with the customer’s consent, whereas Payment Initiation Service Providers (PISPs) are not only authorised to access customer data but also initiate payments on behalf of customers. PSD2 was the catalyst and the regulatory jigsaw piece to open up the payments world to technology companies, paving the way for the development of Open Banking.
Stay tuned for upcoming articles!