What is the difference between open banking and PSD2?

The terms open banking and PSD2 are often used interchangeably, although they’re distinct concepts. The differences between open banking and PSD2 relate primarily to their scope and standards, as well as to compliance to a lesser extent.

Open banking is a term used to describe greater transparency in financial transactions, primarily in the sharing of data between parties. The Revised Payment Services Directive (PSD2) is a directive passed by the European Union (EU) in 2015 to regulate payment services and their providers throughout the EU. It includes significant revisions in the original PSD passed in 2007

These two concepts are most distinct in the scope of their application. Open banking is a legal requirement for the nine largest banks in the United Kingdom, but some smaller banks in the UK have embraced the concept voluntarily. Other countries also are beginning to adopt open banking practices. PSD2, on the other hand, applies to all providers of financial accounts in the EU, regardless of size.

Affected banks in the UK have implemented standards for open banking that include a single, predefined application programming interface allowing banks and third parties to communicate. PSD2, however, has no specified standards, leaving each financial institution free to implement the directive as it sees fit. It's unclear which of these approaches ultimately will prevail in time.

The deadline for compliance with open banking in the UK was January 2018, with most of the target banks meeting this requirement. Compliance with PSD2 has had to be more flexible, largely because EU members first had to pass laws enacting its requirements. The EU's regulatory technical standards (RTS) also proved to be a challenge for financial institutions. Because the RTS requires significantly more stringent procedures for authenticating users than procedures in use by many financial institutions in the EU, the deadline for full compliance with PSD2 was pushed back until January 2020.