EXCLUSIVE: “Part of the Action”

As European regulators begin to shape a new era of API-powered open finance, Italy’s CBI is already positioning itself and its clients to reap the benefits. Head of Banking and Financial Markets, Alessio Castelli, outlines the menu of options

If you envision the EU’s second Payment Services Directive (PSD2) as a simple but classic margherita pizza, could the next iteration be a meat-fest-filled crust of possibilities beyond payment?

The Italian payment provider community and infrastructure provider CBI is preparing for just such a future, and is determined to guarantee itself and its customers a significant part of it. It has seen API adoption and traffic across the CBI Globe open banking platform explode since PSD2 came into full effect in 2019, thanks to the directive’s success in boosting innovation by opening up the payments market to new players.

While it introduced the concept of open banking, it limited data sharing to payment information. Now the EU is actively considering introducing a ‘PSD3’ to create truly open finance. To pave the way, the Commission conducted an Open Financial Framework consultation last summer and is preparing to present an Open Financial Framework Bill in Q2 of 2023 for an update/revision of PSD2.

Similarly, the CBI will argue for the introduction of open finance in its Global Finance Report, which will be released on 23 March. Head of Banking and Financial Markets, Alessio Castelli, says: “The report will look at the development of open banking and open finance over the last two years, presenting the best use cases, new companies and innovations developed by financial institutions, in Italy and across Europe, shows three-digit growth in open banking services.”

Regardless of what PSD3 looks like, it is widely recognized that regulators need to ensure that new rules provide a level playing field for incumbents, neos and fintechs alike, while protecting customers through better oversight. Castelli explains: “Open finance is a new paradigm within the financial landscape, an evolution of open banking that aims to allow end-users, businesses and retailers, to use innovative services that better meet their needs through functionalities with a greater scope than typical banking products, such as personal financial management or asset management.

“It also gives financial companies the opportunity for new commercial strategies, with up- and cross-selling opportunities by leveraging financial data.”

Castelli says that several factors drive the open financial intake, which contributes to such growth of hockey sticks. “The first element of open finance is regulation, where market players must respect the mandatory rules defined by the authorities, as in Europe with PSD2 which forces traditional banks to open their systems to third parties,” he explains.

“The second is market-driven, where players drive different behavior among end users by selling new products that offer a good user experience and broad interoperability,” he adds. The European Commission’s efforts to facilitate open finance include the 2020 Digital Finance Package which aims to increase the market competitiveness of operators within the European Economic Area by prioritizing digitization in finance.

“In Italy, we also have the national competent authority, the Bank of Italy, which offers support to market innovators through channels including the Milano Hub and the Regulatory Sandbox,” adds Castelli. But regulation must be balanced with freedom to innovate, in order to realize its full potential.

“Market operators need to understand the rules well, while regulators need to understand the needs of the market and how the technologies are produced,” he says. “The CBI was selected a few months ago to join the Bank of Italy’s regulatory sandbox, initiated by the Italian Ministry of Finance, with a project called the Invoice Control Database, which aims to become a central solution in Italy for the security of invoice financing.

“This is a great opportunity for us and the Italian market to show all innovators how it is possible to have strong conversations with our national competent authorities. In many ways, therefore, the transition towards open finance is transforming the financial world into a kind of collaborative ecosystem where players can contribute their specialist offerings into what will become a tiered solution, and third-party providers are increasingly critical to making this happen.

Castelli says: “CBI can be seen as an industry tool that helps financial institutions, European payment service providers, enterprises, fintechs, IT providers and public administrations to respond faster and more effectively to market challenges in the digital payment landscape. “We develop frameworks, technical guidelines and collaboration infrastructure around digital services, to help companies with innovation from a B2B2C perspective.”

“Our most important achievement has been to create a strong ecosystem of innovative actors, who collaborate to develop new services on a common technical platform”

And it will have to adapt quickly to ensure its place at the table, especially given current macroeconomic challenges and business behaviour, including operating outside its own borders.

“CBI needs to embrace new business models and collaborate more to increase its competitiveness,” continues Castelli. “Our most important achievement has been to create a strong ecosystem of innovative players, who collaborate to develop new services on a new technical platform. We also work hard to define technical guidelines and implementation guidelines to allow broad interoperability. “We develop and offer also microservices, mainly through REST API technologies that can be easily integrated with broader products or processes, so that they can offer new features with low effort and good time-to-market.”

With this ready-made ecosystem facilitating API connections between banks – both challengers and incumbents – and third-party providers, inside and outside Italy, CBI is ready to expand its community. It aims to capitalize on the effect PSD2 has had so far in opening up the market, and has the appetite to do more.

Castelli adds: “Our Italian activities are focused on the payments industry and we have a strong role in supporting the companies involved, but we are also challenged to support businesses across Europe, attracting interest from companies worldwide, including the United States.

“This is why we are involved in developing new services such as Name Check, a proof of payee (CoP) service, which will be widely adopted over the next few years,” says Castelli. “This is in addition to our invoice control database. , and we are also preparing the new generation of corporate banking services in Italy. And we also have an active role in the European working groups, which are shaping the future of open finance, through innovative use cases and digital services.”

More than 80 percent of the Italian banking industry uses CBI’s Globe platform, and over 200 payment service providers have processed over 300 million API calls through it. About 10 million citizens have used the CBILL service to pay 200 million bills and pagoPA payment messages, while the open financial ecosystem reaches “100 percent of domestic current accounts and leading international platforms.”

It also supports 400 payment service providers; around three million Italian companies use their payment processing standards and “seven central public administrations have facilitated access to the Italian financial industry.”

A PAYMENT REVOLUTION

The CBI’s involvement in the national regulatory sandbox aims to eliminate the risks and costs associated with false invoices in the B2B2B space. Selected intermediaries and other third parties are also involved in the operational workflow, which is open to welcoming new players. They perform various operations in real time to see how these can be protected against errors and fraud, through REST API interfaces, with data streams protected by advanced encryption and using CBI’s technologies to create a centralized database of information related to advanced bills, from a multi-bank and multi-channel perspective. Ahead of its successor’s introduction, a 12-month, industry-wide EU consultation on the success of PSD2 was initiated by the Finance Commissioner in May 2022.

The commissioner wants to determine whether the directive achieves the goals of opening up banking by forcing banks to give their competitors access to customer data, reducing fraud by introducing new security measures, and cutting card transaction fees by banning surcharges for debit and credit card payments.

Hundreds of trade associations, companies and individuals have so far responded, including the European Banking Authority (EBA), which said the benefits of PSD2 are starting to materialise, writing in its submission that “the security requirements – in particular the SCA – have the desired effect of reducing fraud’, with cases three times higher for payments authenticated without SCA. Despite any teething problems that may have arisen, it is widely acknowledged that PSD2 heralded a payments revolution. It increased competition and innovation in payments, and more than 2,700 new payment and electronic money institutions have been registered since it came into effect. The EBA has acknowledged that any future iteration should include pensions, insurance and investments. So, which financial functions have accounted for the largest share of the CBI’s increase in API figures over the past two years?

“Our analysis showed a 35 percent year-over-year increase in the number of APIs offered by fintechs, most with commercial rather than mandatory applications,” says Castelli. “Ninety-five percent of APIs have informational functions such as account aggregation, while the other five percent deal with payment initiations.

“And these APIs can of course be integrated into other fintech applications – for example, personal financial management and savings management.” The report highlights a 93 percent growth in the number of third party providers operating within SEPA and a 130 percent growth percent API growth in recent months, with a strong increase in the use of the informative services. “So we work on all these activities,” says Castelli, “to offer our customers the best solution, the highest interoperability and the best user experience.”

This article was published in The Fintech Magazine issue 27, pages 11-12