Is SPAA the Missing Piece for Successful Open Banking?
In parallel with a review of PSD2, the EPC (European Payments Council) started working on a scheme based on their lessons learned from PSD2 and open banking. They did so at the request of the Euro Retail Payments Board, a multi-stakeholder forum presided by the European Central Bank.
That scheme is called the Sepa Payment Account Access (SPAA) scheme.
We invited the Co-Chair of the SPAA Multi-Stakeholder Group, Gijs Boudewijn (also GM of the Dutch Payments Association). He was so kind to ask David Birch, author, advisor and commentator on digital financial services.
Gijs: "The SPAA stems from the discomfort and unhappiness of both sides of the market, banks as well as TPPs, with the results of open banking, as defined in PSD2, lacking, on the one hand, the functionality that the TPPs would like to have, and lacking the incentive for the banks to create good API's and good functionality."
SPAA is different
Both sides of the market sat together, and with PSD2 as a baseline, they decided to build a 4-corner model, agnostic of what is being exchanged. There is the asset holder, the bank with bank accounts (2 corners) and the asset broker, TPPs with asset users (merchants) (2 more corners).
That is why there is a Co-Chair of the Multi-Stakeholder Group: Gijs represents the banks, and Arturo González Mac Dowell from Tink represents the TPPs.
They generalised what can be exchanged as "assets". These assets can be data as well as transaction assets. Gijs: "It leverages existing PSD2 investments. Basically everything inside the scheme is existing and new premium functionalities come with existing technology, but it just harmonises it and makes it scalable."
That way, the industry could improve the PSD2 use cases, and they leave the door open for more innovative open finance use cases in the future. SPAA will be based on premium APIs, meaning they bring more value, and in the philosophy of "a fair distribution of risk and value", the consumption of these APIs will also be compensated.
We quickly drew the parallel with EPI, which isn't the correct comparison in David's opinion. "Trying to build an alternative to cards never quite seemed right to me", he said. "I always thought the idea of looking towards the more sophisticated account-to-account solutions was a better way forward."
EPI was about payments, he concluded on this topic, "It was much too much focused on emulating what we already had. SPAA is about much more than payments. And in my opinion, I feel much more positive about this because it's based on things that Europe has, things that don't need to be developed, things we've already got, and just using them in different ways."
SPAA replacing cards?
So SPAA is a scheme to initiate payments, building on similar use cases as cards. But will it have the richness of card schemes? Can it fully replace cards, their dispute management, exception handling, chargebacks and guarantees?
Gijs agreed that the SPAA scheme needs rules for disputes and refunds. Payments are about trust, so if a consumer asks for money back from a merchant, the merchant needs an easy way to fulfil that request. Chargebacks are not in scope, as the SPAA payments will be instant.
When we asked David whether he believes SPAA could replace cards, he gave a somewhat surprising answer, in my opinion. David: "80% of discretionary spend for the average household goes on five retailers. If those retailers decide to move their payments to an app linked to the SPAA scheme, and the retailer can give their incentives and rewards, I'm OK with that."
I thought that was very interesting.
SPAA shouldn't replace cards, he said. Cards remain valuable to consumers in a context where trust is (somewhat) lacking. David gave the example of aeroplane tickets. Most frequently, he uses British Airways. They know him, he knows them, and there is a relationship of trust—no problem for David to use SPAA in this context. He may still prefer to use AmEx for more exotic trips requiring him to use a different aeroplane company.
With the explanation, he also implicitly said, in my opinion, that cards today have a market that is 4 times bigger than it should be in a work of account-to-account payments. So how can merchants be convinced to switch to SPAA for specific clients or use cases?
The working groups are now developing the MVPs feasible to implement in the short term and making them more attractive over time with extra functionalities on top of what PSD2 mandates today.
Next to that, they are working with a consultancy firm on fee setting between participants in this new scheme. The idea is to work with a per asset cost + margin methodology and an access fee. As it does not exist yet, it is a difficult job to do, but, as Gijs explained, feedback from merchants showed that even the MVP could end up with significant volumes and success, if provided at the right price.
Again: it will not be easy to eat away part of the cards market, an ecosystem of 7 decades old, but with the right price, it is possible to build a business model that benefits banks, merchants, TPP and the end-customer.
On March 7, the EPC Board should endorse the rulebook's first version and the default fees.
The deadline for a rulebook into force is November 30. From that moment on, organisations can join the scheme. This assumes a stable version of the rulebook, an attractive pricing mechanism, a viable business model and pilots to test to MVP, and enough market interest to join to avoid a scenario like the Proxy Lookup Service, as Gijs explained.
The payments market is moving and shaking. SPAA is only one of the initiatives influencing the way we pay tomorrow. Although there is still a lot of work left for the EPC, the short deadlines show that we will quickly see the first results.
I cannot wait to evaluate these first results in a year and look forward to Gijs' moderation on May 16, on "The Sovereignty of Europe, Evaluating the Next Steps for Retail Payments", where SPAA will probably play an essential role in the debate as well.