The slow progress of identity checks risks slowing the European adoption of open banking and exposing users to fraud.

According to a paper from global SaaS company Konsentus, European financial institutions operating in the open banking ecosystem are faced with serious risks due to increased levels of open banking fraud.

The group analysed the European Banking Authority’s Opinion and Report on the review of the Payment Services Directive (PSD2), the legislation that introduced open banking.

The report identified significant issues and dangers around proving the identity and current regulatory permissions of third-party providers (TPPs) that deliver open banking services.

Open banking is a set of standards based around the principles of transparency, and privacy, giving users control over how their data is used. Using open-source technology, it allows customers to securely share their financial data between organisations, making transfers faster and opening a wider range of services.

When data is shared under open banking, banks must ensure that they are giving information to the correct entities and are liable for any data given to unauthorised third parties.

However, the regulatory permissions which allow TPPs to deliver open banking services across the EEA can change at any time. If banks continue to share data with TPPs which do not have the correct regulatory status, they could face regulatory fines and be in breach of GDPR.

Among the EBA’s 200 proposals are nine proposals for legislative change which will reduce risk and enhance consumer protection by determining the identity and current regulatory permissions of TPPs in real-time.

However, there may be several years until any recommendations come into effect, meaning that banks will be exposed to the risks identified by the EBA for some time.

Konsentus CCO Brendan Jones said: “Banks face genuinely frightening possibilities if they fail to check the identity and regulatory status of TPPs adequately. They are liable for both unauthorised access to data and fraudulent transactions, which could result in reputational damage and significant financial losses.

“The damage caused by high-profile regulatory action could dent confidence in the wider open banking ecosystem, potentially hurting all players and slowing down the pace of adoption across Europe.

“We welcome the EBA’s recommendations, but also warn banks that they must take action immediately to mitigate the risks. Legislation will take some time to come into force, so financial institutions must resolve the risk around identity and regulation themselves.”

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Research from earlier this year found that the UK leads Europe on the adoption of open banking.

The UK scored highly, according to Yapily, based on the country’s significant political support and a pro-innovation regulatory environment.

This success can be seen in the growth of open banking in the UK. Since being introduced in January 2018, the standards reached both the five million and six million UK user milestones this year. Previously, it took 10 months to go from one to two million users in 2020.

However, for European countries, there are still challenges around banks, governments, regulators, and TPPs collaborating to promote the standards. A lack of standardisation and inconsistent levels of regulatory oversight and enforcement are also hampering open banking.

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