Open Banking in France: Opportunities, Challenges & Recommendations
13:55 29 Aug 2023 A briefing on the French ecosystem exploring the revised Payment Services Directive (PSD2), identifying potential avenues for progress, highlighting challenges and discussing recommendations for both fintechs and banks.
Many countries across the globe have seen that the potential benefits of Open Banking are vast and far-reaching. Open Banking, by allowing financial institutions to share data between unaffiliated parties through APIs, has the potential to improve customer experience, as financial institutions can leverage data from third-party providers to offer personalised and targeted products and services.
As a market leader, the UK has maintained a significant advantage over other European markets due to a combination of factors: the adoption of a well-defined API standard, uniform implementation across banks, robust guidance for fintechs, and regulatory oversight of API performance have collectively lowered the barriers to entry for new market players. According to European industry experts, France and Germany are ranked second and third, respectively, in terms of Open Banking implementation. In France specifically, variations in the implementation of PSD2 have hindered progress for some banks and companies seeking to implement the new regulations, resulting in significantly higher costs than in the UK.
The purpose of this report is to give a comprehensive summary of the present status of Open Banking in France, identify the hurdles confronted by the sector, and pinpoint potential avenues for progress and innovation.
Background: Open Banking in France
PSD2
The European Union has been leading the way in open finance regulation, with the updated version of the Payment Services Directive (PSD2) setting the rules of engagement. France, like the UK, has also adopted PSD2, and its policy-driven approach to open finance can be attributed to its history of government-owned banks in the 1990s. However, despite the policy focus, French banks were not technically prepared for the adoption of PSD2 and were content with the multiple delays that were put in place. Nonetheless, the adoption of PSD2 in France is a significant step towards increased competition and innovation in the banking sector, which should ultimately benefit consumers and businesses alike.
Open banking in France has developed through a bi-model system that involves both regulatory and policy-driven approaches. While the top banks in France have adopted open banking principles beyond regulatory requirements, the industry has faced significant corporate cultural challenges. Facing new regulation, French banks were initially reluctant to embrace open banking and collaborate with the broader financial ecosystem. However, with the first API opened by Axa Bank in 2012, other banks started to follow suit. A few years later, Crédit Agricole’s Calyon Bank, which had the most advanced APIs, rolled out API connections. Long before the regulatory deadline, Calyon Bank was the first bank to really embrace a strong public API strategy for open banking as we know it today (Global Open Finance Index, 2022).
“French banks learned the hard way that you have to embrace the ecosystem instead of working against the ecosystem.”
Source: The Global Open Finance Index (Click here to download).
Current Status of the French Ecosystem
ACPR & PSD2
The Autorité de Contrôle Prudentiel et de Résolution (ACPR) is the regulatory body in France responsible for overseeing the implementation of PSD2. The introduction of PSD2 has significantly impacted the way users experience banking and card payments, with the ability to use these services now reliant on a consumer’s ability to be tech-savvy. While this has led to increased adoption of digital financial services, there is still significant room for improvement in terms of creating a seamless user experience for payments and finance. As banks and fintechs work towards developing more intuitive and user-friendly interfaces, the adoption of these services is expected to accelerate further, leading to increased competition and innovation in the financial sector.
PSD2
PSD2 has been instrumental in regulating how banks share data in Europe. In France, approximately 90-95 percent of French banks are now adhering to the aforementioned regulations. However, not all banks have migrated to APIs, and several stakeholders still rely on screen scraping to access data. Even among banks that have migrated to APIs, they primarily use them for basic PSD2 compliance rather than providing full end services. Moreover, APIs and the basic rails for data sharing are now in place for most banks. According to industry insiders, over the past 3 to 4 years, one market leader, BNP Paribas, has heavily invested in Europe and France to ensure compliance with PSD2.
However, the full potential of the financial market has yet to be realized, with many untapped opportunities for innovation and growth. For example, credit scoring is a solution that is not yet fully developed, but has significant potential. By leveraging customer data, banks and fintechs could offer better credit products such as cards and loans.
Banks and fintechs
In today’s digital age, the French banking industry is constantly forced to evolve and adapt to new technological advancements. With the rise of Fintechs and the decrepitude of many banks’ IT systems, traditional banks have not been able to keep up with the latest developments in financial technology. Instead of investing internally in new products and services, many banks in France are acquiring Fintechs to improve their own product offerings.
This has resulted in a mutually beneficial relationship between banks and Fintechs, where banks are able to offer their customers innovative solutions while Fintechs can expand their customer base through partnerships with established financial institutions. Banks have also been encouraged to be more innovative and open more APIs to third parties, as well as build more partnerships with Fintechs to enhance their user experience. One such example is Qonto, a neobank that has raised significant funding to become one of the largest new banks in France.
Despite initial concerns about customer loyalty, customers were attracted to the best services and user experiences, leading them to switch to neobanks that offered superior user experiences, even if they had less brand reputation or perceived security than established banking institutions.
Other industry developments
The industry is also currently experiencing a second wave of innovation with bank-to-bank payments and strong authentication on merchant sites, eliminating the need for traditional payment methods such as credit cards. This innovation is made possible through Bank-to-Bank APIs, which have minimal costs and help to prevent fraud. The market is likely to embrace this type of innovation because it offers cost savings on transactions for both consumers and businesses.
Over the course of a decade of involvement in the Open Banking space, several obstacles have arisen for stakeholders operating in the financial ecosystem. After conducting interviews with a range of specialists in the industry, such as regulators, banks, and fintech companies, several recurring themes have emerged.
Challenges for banks
Lack of standards for implementation
While the regulations regarding Open Banking are clear, there is still confusion surrounding its implementation due to the lack of standardised guidelines for banks. Three API initiatives, including Open Banking UK, STET in France, and the Berlin Group, each propose different standards for implementation, therefore adding complexity for banks to implement the standards.
Despite efforts from banks to explain the benefits of sharing data with third-parties, consumers in France remain cautious about doing so. Additionally, there is currently no agreement on a framework for Open Banking in France, which, some industry insiders say, has led to banks attempting to circumvent regulations. While banks are obligated to provide APIs, the lack of API standardization and stability presents a significant challenge. This stands in contrast to the UK, which has successfully implemented Open Banking due to the creation of a working group consisting of fintechs, banks, and regulators during the policy design phase. In the UK, Open Banking was viewed as an opportunity for innovation, whereas in France, it was seen by many as a risk due to concerns around compliance, competition, and cybersecurity.
Lack of dialogue amongst the industry
Moreover, the lack of dialogue between banks, third-party providers, and regulators in France has become a significant obstacle to the development of efficient financial services. In the past, there was a promising working group that focused on the development and implementation of the CNPS API, which could have been a groundbreaking step in fostering collaboration between all stakeholders. However, to the dismay of many, the ACPR decided to terminate this initiative prematurely, leaving a void in the communication and coordination essential for the advancement of the financial sector.
Rekindling the dialogue between banks, third-party providers, and regulators in France is essential for driving financial innovation and maintaining a competitive edge in the global market. By revitalizing the working group, focusing on projects like the CNPS API, and actively engaging all stakeholders, France can foster an ecosystem where technology, regulation, and collaboration will thrive harmoniously.
Market segmentation
Banks have yet to respond effectively to the specific needs of their customers due to their lack of market segmentation. Unlike fintechs that offer targeted services for particular market segments, banks struggle to segment their customer base due to the broad nature of their services. Retail, high net worth (HNW), and corporate customers all have different requirements and needs to be satisfied. The retail sector is particularly intricate because it comprises multiple subcategories of customers (age, gender, lifestyle) that must be catered to. As drivers of financial innovation, Fintech companies are bridging that gap in the market.
Lack of incentives for innovation
Although the French government is pushing regulators to encourage innovation, banks still hold considerable power in France and have interpreted regulations in their own way. Banks are also hesitant to open their data channels to third-parties and want to be compensated for the cost of doing so. While France has access to all the necessary technologies for personal data quantification, banks have a vested interest in keeping their customers uninformed, and their bureaucratic culture contrasts with fintechs’ entrepreneurial spirit.
Challenges for fintechs
Lack of consumer awareness
Additionally, French consumers have a different mentality towards fintech compared to those in the UK and the US, with little advertising or investment made to promote these services. A lack of communication and funding for advertising may be a significant factor in French consumers’ reluctance to adopt fintech.
Despite this, educating French consumers on the benefits of Open Banking remains a priority. Consumers need to understand that Open Banking goes beyond just consolidating accounts and offers improved reliability and security, as well as better fraud prevention measures. However, there is still a lack of knowledge among consumers, which could be improved through more mass communication efforts from regulators and banks.
Recommendations for banks
Education
In terms of Open Banking, education plays a crucial role here. It is imperative to educate consumers about the advantages of Open Finance, as they are more likely to utilize these tools when they understand their positive impact. Similarly, it is vital to educate government officials, regulators, and policy makers about the positive use cases to drive momentum and progress.
Enforcing regulations
The French regulator has been taking a firm stance on banks that do not comply with Open Banking regulations and has warned of possible fines. However, there is also ongoing communication and dialogue between different players in the industry. According to industry insiders, the regulator sees the upcoming Mica regulations as positive for the industry, as it will allow for a convergence between centralized and decentralized finance.
Improve innovation internally
In today’s rapidly evolving financial landscape, fostering a culture of innovation within the banking sector is crucial to stay competitive and address the changing needs of customers. One possible solution is to link innovation incentives to the remuneration of bank executives, as employees in banks tend to be risk-averse due to fear of job loss. However, creating a balanced incentive framework is essential to ensure that innovation incentives do not compromise the overall stability and long-term health of the bank.
Moreover, clearly defining metrics to evaluate innovation efforts will be crucial. These metrics should go beyond mere financial gains and consider factors like customer satisfaction, process efficiency, and the adoption of new technologies. Apart from incentivizing top-level executives, banks should also encourage a culture of intrapreneurship among all employees. By offering recognition, rewards, and career advancement opportunities for innovative ideas from any level within the organization, the bank can tap into a broader pool of creative minds.
Recommendations for fintechs
Gain consumers trust
Fintech startups have revolutionized the financial industry by offering innovative solutions and convenient services. However, similar to big tech companies, gaining consumer trust remains a significant challenge. To overcome this lack of trust and establish credibility among French consumers, fintech startups should focus on transparency, data ownership, and process improvements.
Furthermore, fintech startups must proactively communicate to customers that their data is owned by them, and the company respects their rights over it. This can be done through user-friendly privacy policies, terms of service, and consent forms that explicitly state how customer data will be used and protected. Being transparent about how customer data is collected, stored, and utilized builds trust. Startups should also disclose the purposes of data collection and provide customers with the option to review and modify their data preferences. Additionally, fintech startups should establish ethical guidelines governing the use of customer data. Avoiding any manipulative or exploitative practices will enhance the startup’s reputation and foster trust among customers.
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