The revised Directive on Payment Services (PSD2) is set to open up banking in Europe. It regulates providing standardized access to banks’ customer data and banking infrastructure, thus lowering entry barriers for third party providers and new FinTech companies. It is widely believed that this will provide the impetus for new business models, and a whole new wide range of banking services. It will be a catalyst for both disruption and strategic renewal in Europe’s banking markets.
The new regulations are aimed at bringing new, online modes of payments initiation under responsible regulations. It emphasizes transparency across products and services provided by payment service providers (PSPs) and the charges levied on their customers for availing these services.
PSD2 is also leveling the playing field for smaller payment service providers who can now directly compete with established banks and financial players. It is being hailed as a ‘revolutionary’ way forward that is sure to positively impact everything from the way we pay online, to the data we generate when making a payment.
ACCESS TO PAYMENTS ACCOUNTS
At the heart of the new regulation is XS2A, which is the Access to Payment Accounts.
The usual practice for banks till now has been to prohibit their customers from sharing their banking credentials with third party services. It is considered as breaking Terms & Conditions of the bank by customers when they access their own financial data for purposes other than online banking. There are some providers who do provide these services, but it’s impossible for FinTechs to develop a service based on data or other functionality of bank accounts.
Now, banks no longer own the sole rights to the huge amounts of data generated by their customers. They cannot prohibit their customers from using third party services that employ their banking data. They have to share their access to these third party services through a technical interface.This is a huge shift for traditional banks since they are used to maintaining strict ownership of their customer data, financial or otherwise. PSD2 puts the control firmly with the
This is a huge shift for traditional banks since they are used to maintaining strict ownership of their customer data, financial or otherwise. PSD2 puts the control firmly with the customer and lets him choose from a wide range of banking applications, and not just their own bank apps.
All indications suggest that our banking future will look like the App Store, rather than the variety of apps from different providers.
WHAT TO EXPECT FROM PSD2
PSD2 will ensure the drafting of new rules, with the following aims:
- Greater customer protection when using digital devices for making payments
- Promote development and use of innovative online and mobile payments
- Safer cross-border (currently European) payment services
The improvements from the initial PSD are:
PSD of the existing EU Directive from 2007 helped create a single payments market across Europe. The earlier Directive called for banks to open up access to their customer accounts to third parties for the purpose of consolidating account information and for making payments.
- Coverage for new modes of payment initiations through mobile phones, digital wallets, e-commerce sites, and social media channels
- Introduction of new payments players such as Payment Initiation Providers (PISPs) and Account Information Service Providers (AISPs)
- Ceiling on transaction fees and implementation of strict rules to maintain transparency
- Mandate on European banks to open their payment infrastructure and customer data to third-party providers (will probably happen through APIs)
IMPACT ON GLOBAL PAYMENTS
PSD2 will encourage emerging payment methods and the new-age AISPs, forcing banks to allow retailers, other banks and FinTech startups access to their customer data.
PAYMENTS INNOVATION SPARKS DISRUPTION AND DISINTERMEDIATION
The innovation in payments is certain to usher in a new age of customer-centric banking. By putting the customer at the center of the ecosystem, and by making them the owners of their data, PSD2 enables them to centralize their account information, their payment options, and related information in unified mobile applications. The customers can now conduct day-to-day banking on any platform that they choose, which could be provided by their bank, or the newest FinTech kid on the block, whoever offers the most intuitive and seamless customer digital experience.
Some analysts are concerned that this is an obvious threat to banks, through disintermediation. The open regulations will be directly responsible for a dramatic erosion of their payment revenues for them, as well as dent their interest-based revenue streams because of loss of ‘customer ownership’. This is due to bank-customer interactions being displaced by FinTech or traditional financial service companies that are geared towards the progressive regulations.
With these current advancements, the power of customer relationships would definitely shift towards FinTechs, while traditional banks are reduced to providing infrastructure maintenance.
Though it is impossible to predict the ways in which the new regulations will influence banking in the future, the competition between banks (sitting on tonnes of proprietary customer data) and FinTechs (which will get access to data as per regulations) is sure to heat up. On the whole, we can be sure that the world is moving towards banking without banks. Banks will have to take a backseat to customer requirements, from markets to product development.
BANKS CAN TURN PSD2 INTO A COMPETITIVE ADVANTAGE
Banks are at crossroads currently, with compulsory regulations that are going to have a strong impact. Their strategic options for way forward can be classified as follows:
- PSD2 Compliance
- Leverage the first-mover advantage
- Innovation & Expansion through data-driven insights
- PSD2 Compliance
Banks will have to comply with the PSD2 requirements and open their data to other people. The obvious and immediate impact will be a loss of volume and limited customer interaction. However, this is not a phase they can tide over and will have to strategize for the intensified competition with FinTech players. Some banks might choose to reduce their business offering to providing liquidity and infrastructure. This will make them a ‘utility’ provider, just managing the underlying customer accounts, processing payment transactions, or maybe even providing liquidity and credit services through a third-party provider who owns the customer experience.
- Leverage the first mover advantage
PSD2 only mandates the opening of certain bank APIs, such as payment accounts, transaction and balance data, Credit Transfer initiation, and account identity verification. They do not have to, and probably won’t, share access via APIs to additional customer data such as non-payment accounts, customer demographics, identity documentation, and direct debit mandates.
So banks can extend their API development beyond the minimum PSD2 requirements, and empower the customer themselves with the above mentioned additional data sets. They are at the business crossroads where they can expand on the scope of the change that is upon them. Simply put, this means that they can proactively extend their development processes to include enriched (categorized, merchant-mapped) transaction data, customer demographics, & broader financial product holdings. Transaction based marketing intelligence can aid in creating data-driven banking products & services, such as our personal finance product and account aggregation services.
They do have the opportunity to monetize additional APIs, by competing or collaborating with FinTechs of today that work on niche specialties.
- Customer data driven insights to fuel innovation & expansion
Banks will be able to provide a customer-centric, digital banking portal, that will influence the entire customer value ecosystem. This will leverage mutually beneficial relationships between banks and third party providers which can create value for their customers. This is a potential revenue opportunity that can benefit the customer, TPP, and the bank also.
There’s a huge opportunity here for banks to turn the regulation – and the broader shift towards open banking – into a competitive advantage. Banks should explore creating their own AISPs to provide their customers access to their other banks and payment methods, all within one (branded) mobile app. They could partner with FinTechs to use that data to identify trends and create new targeted customer propositions. Or they could explore ways to sell the information to retailers and other third parties.
There has been sufficient notice about the process and the requirements of the PSD2 regulations for the EU & UK banks. Though there are some apprehension and reservations about how it will be adopted under different laws, it is widely agreed that new regulations have been due for some time now.
We believe that this is a huge strategic shift, but not necessarily detrimental to banks. This could also be a great opportunity for early movers if they can innovate their payment practices to gain a competitive advantage in innovation, as well as customer experience.