Evolution of Open Banking: PSD2 to PSD3 and Beyond

With PSD3 regulation set to take effect within the next two years, we examine how Open Banking has revolutionised financial services and how it can continue to drive transformation in the industry.

The impact of the Payments Services Directive 2 (PSD2) on European financial institutions is monumental. Enacted by the European Parliament, PSD2 facilitates seamless third-party data sharing among financial organisations, payment providers, and other entities. This directive has paved the way for the development of innovative products and enhanced customer experiences.

In contrast, the United States has seen market-driven momentum behind Open Banking, a framework fostering third-party data sharing among financial service providers to match the innovation strides seen in the EU.

Since its inception in 2018, Open Banking has not just evolved—it has "exploded," according to Andy Wiggan, Chief Product Officer at GoCardless. "That we’ve gone from introducing ‘Open Banking’ as a theoretical concept in 2016 to one in seven digitally active UK consumers having used the technology today is testament to exactly how far we’ve come," he states.

PSD2 has introduced API standardization, making data transfer more efficient, and implemented rigorous security measures across data-sharing partners. Strong Customer Authentication (SCA), which requires two types of customer verification, has significantly reduced fraud and bolstered the security of online transactions.

Raouf Mhenni, Chief Commercial Officer at Sopra Banking Software, explains, “Before PSD2, Open Banking operated within constraints, relying heavily on screen scraping by Third-Party Providers (TPPs) to access financial data. This method was unreliable and insecure, offering minimal control to customers and stifling innovation.”

In just six years, the innovation sparked by PSD2 has profoundly impacted consumers. Bart Willaert, EVP of Open Banking International Markets at Mastercard, notes that Open Banking has led to "smarter and more meaningful digital experiences, putting consumers at the center of where and how their data is used."

Mhenni adds, “PSD2 enables banks to seamlessly connect and exchange data, allowing consumers to consolidate their financial information and perform more actions with less movement across accounts and apps. The rise of pay-by-bank, where customers can securely pay online directly from their bank account, is a prime example.”

The growth trajectory of Open Banking is poised to continue upward. Willaert cites a Forrester report predicting that from 2022, the number of Open Banking users in Europe will double by 2027.

Wiggan believes we are still in the "early days" of Open Banking, anticipating further growth driven by new regulations and innovations. "With the 'Phase I' rollout of commercial Variable Recurring Payments (VRPs) due later this year, payers can benefit across more use cases, like regular donations to charities or seamless money transfers across savings and investment applications," Wiggan says.

PSD3: Enhancing Open Banking for Greater Adoption

The significant rise of Open Banking will be further bolstered by the upcoming Payments Services Directive 3 (PSD3), set to take effect in 2026. While not as groundbreaking as PSD2, Mhenni believes PSD3, along with the Payment Service Regulation (PSR), will standardise Open Banking practices across the financial services industry more uniformly than PSD2.

“PSD3 will enforce uniform Open Banking processes across Europe, unlike the varied implementations seen under PSD2,” Mhenni states. “It also imposes stricter oversight and penalties for non-compliance, eliminating the mandate for secondary 'fallback interfaces' under PSD2, thus encouraging banks to embrace large-scale digitisation.”

Additional regulatory enhancements in PSD3, particularly in Strong Customer Authentication (SCA), will allow customers to update security measures every 180 days instead of 90, offering more flexibility and convenience.

Beyond PSD3: The Expanding Horizon of Open Banking

PSD3’s influence is limited to payments, but other initiatives like Financial Data Access (FIDA) aim to extend Open Banking principles to insurance, investments, and savings industries. Willaert observes, “FIDA will open access to a broader range of financial data, enhancing consumer protection, innovation, and competition in financial services.”

The real value lies in cross-vertical use cases—combining loans, insurance, and payments to simplify and enhance consumer experiences. As Willaert puts it, the future of Open Banking might transcend traditional banking, evolving into an interconnected ecosystem of services.

“We’re moving towards open finance and smart data,” says Willaert. Open finance allows diverse companies to offer Banking-as-a-Service (BaaS) capabilities and platform banking, integrating a variety of financial and lifestyle services into cohesive, super app-like experiences.

Mhenni explains, “Leveraging Open Banking, these models create experiences blending traditional banking with lifestyle services such as travel perks, insurance, and rewards—all in one place. Open finance is gaining traction beyond traditional banking, with non-banking sectors like energy and telecommunications embracing Open Banking to enhance customer service and insights.”

Laura Friend, UK Enterprise Lead at Amplitude, concludes, “With a deeper understanding of their customers, companies can make targeted improvements that create effective, enjoyable digital experiences. Whether moving money, checking credit scores, or making loan payments, users want seamless, fast interactions, even across different products and applications.”

As we move into this new era of financial innovation, the LupoToro Group remains committed to staying at the forefront of Open Banking and its transformative potential.