Technological innovation – driven by the emergence of a tech-hungry generation – has become a huge catalyst for change across the financial services industry. Certainly, the payments space has altered significantly in recent years, with new players including fintechs and challenger banks entering the market, and increasingly sophisticated digital solutions coming to the fore.
It is crucial that regulation works in tandem with the evolving market to ensure it remains fit for purpose and can effectively address the needs of the environment. And in recognition of the degree of change taking place, European legislators are revising and updating the Payment Services Directive (PSD).
PSD1, which was published in 2007, was designed to help harmonise the European market for payment services, and PSD2 – due to take effect in January 2018 – retains and builds upon the benefits of its predecessor, with enhancements to transparency, customer protection and security (particularly with respect to online and mobile payments), and pricing. The scope of the legislation regarding transparency information requirements, rights and obligations is now also extending to include payments that are “one leg out” – i.e. transactions where one party is outside the European Economic Area (EEA) – whereas previously, the legislation incorporated only intra-EEA transactions. This, of course, also means that the regulation will extend to include all currencies, thereby impacting greater numbers of payments and industry participants.
Preparation for PSD2 has been underway for some time. Key considerations for banks include technology investment, revision of processes, procedures and business strategy, and the identification of potential new services.
Without doubt, PSD2 is set to generate considerable change. And there is another aspect of the new legislation that could have particularly far reaching implications – and potentially redefine the payments landscape as we know it.
Fostering competition, fuelling cooperation
A key aim of PSD2 is to stimulate competition in the EU payments market, making it easier for new entrants to gain a foothold in the payments space. Going forward, banks – at a customer’s request – will be required to share their client data with third party payment providers (TPPs), in order to support the payment services being offered by those new entrants. This will not only help to facilitate the business propositions of TPPs – with robust customer account information from banks underpinning their services – it will grant them direct access to a significant customer base. This “open banking” approach could fundamentally alter the payments value chain, and require banks to reassess their business models.
The influx of fintechs and other providers into the payments space has already been astonishing, and the introduction of PSD2 is only expected to further fuel this trend. Furthermore, a recent survey revealed that 88% of consumers use third-party providers for online payments, indicating a strong appetite for digital evolution and the new transaction landscape that PSD2 aims to create.
The stage has been set for a new state of play in the payments market, and understandably, there is a great deal of uncertainty with respect to exactly how the regulatory changes will impact all players involved. Yet with the payments space evolving around them, a “wait and see” approach could be viewed as a potentially risky strategy for banks. Therefore, while PSD2 might present challenges to the banking industry, with the benefits and possibilities of fintech becoming ever-more evident, many banks are embracing the opportunities that are being created by the shifting environment and devising forward thinking digital strategies.
Banks are tapping in to the vibrant fintech scene, working with both fintechs and clients on new, innovative ideas and concepts that could enrich business processes and the transaction experience. And while PSD2 is set to affect the way in which banks and TPPs interact by opening up access to information, it can also act as a platform for innovation and collaboration, thereby helping to create a new wave of partnerships.
PSD2 and innovation
Guidelines on how banks will be required to share client data with TPPs have not yet been published by the European Banking Authority, but it will likely be through application programming interfaces (APIs). APIs facilitate the effective, efficient exchange of data, and are also powerful means of quickly, easily and cost-effectively developing solutions – and PSD2 is helping to pave the way for more extensive use of APIs.
APIs are seen as an important digital payment enabler, and their benefits are increasingly being recognised and leveraged. BNY Mellon, for example, has developed NEXEN – a cutting edge platform that brings solutions and data together from BNY Mellon, clients and select third-parties, including fintechs. More than 100 APIs are currently available in the API store, which will update and grow to accommodate evolving client needs.
This flexibility is particularly important in the rapidly evolving landscape, as banks need to be able to adapt quickly and deliver services and solutions in line with market and regulatory developments. Certainly, the pace of change means that there is scope for legislative updates in the future. Furthermore, importantly, APIs can allow banks and clients to work more collaboratively on the development of new solutions – helping banks to deliver a truly client-centric transaction experience.
Customer centric models will be key for all financial services providers. But considering the differing cultural behaviours, buying power and demographics of different countries throughout the EEA, achieving this is no small task. For instance, Germany has an aging society, with less of a penchant for digital payments than some countries in the EEA. And these differing requirements must be remembered throughout the digitisation journey, with banks and regulators working to ensure that populations throughout the EEA can participate in and benefit from new legislation, services and products – with an updated and evolving regulatory framework that balances innovation, competition and consumer protection.
PSD2 is acting as an important enabler for innovation, and as a result, the payments space could look considerably different in the coming years. But by adopting a carefully considered client centric strategy (in collaboration with both fintechs and clients themselves), and taking a strategic approach to technology investments, banks can not only adapt to the developing payments space, they can be positioned with the capabilities they need to deliver an optimised, value added digital payments experience.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.