PSD2 and the payments ecosystem metamorphosis: How banks can save the banks

By alain vansnick | 19 September 2017

With the activation of PSD2 regulation beginning in January 2018 for all EU countries, third parties will get access to financial data of banking customers under the condition that those customers gave their explicit consent.  While this new legislation will open up the payment space for new Third Party Providers (TPPs) such as Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs), and as such create an increased competition for payments services traditionally offered by banks, PSD2 will also create new opportunities for corporates and retailers.

While PISPs and AISPs will focus on gaining marketshare from the banks, retailers and corporates expect to be able to enhance loyalty, customer experience and client satisfaction thanks to this disrupting regulation.

In today's world, consumers are increasingly looking for omni-channel experiences and more relevant loyalty rewards, so the new opportunities, that the consumer centric European legislation is unlocking, are very much welcome in the current climate.

Will these be seized primarily by the well renowned Over the Top players, free from any legacy technical burden and thanks to their immense user communities, leaving banks watching their disintermediation nightmare unfold?

How will the landscape for financial services change?

Retailers are very much challenged by the change in buyers’ behaviour. Consumers are increasingly demanding, everything needs to go faster, easier and more efficiently. Convenience is becoming the new loyalty driver and the consumer is sitting in the driver’s seat. Competition in the retail space is huge; for banks and other payment service providers to deal with the increasing consumer demands it is imperative to analyse in which areas to invest and in which areas to slow down. Due to the complexitiy and increasing speed of change, the availability of data analytics and the ability to make smart use of the same becomes crucial to enable the right decisions.

This is one of the reasons why PSD2 regulation is not to be seen as a pure threat to banks’ market shares in payments. Banks’ applications sit on huge data vaults, so banks are in a unique position to re-think and enhance their services, helping corporate and retail customers to derive value from their financial information. In addition, an entirely new market segment arises for Banks to address: this is composed of TPPs developing new ways to use account and transaction info, building on top of banks’ data and infrastructures.

An immediate benefit this revolutionised ecosystem can obtain as a whole, is an improved risk management: based on collected and interrelated data, both retailers and other TPPs (with approval from the consumer) can gain much better insights in the financial stability of consumers and/or providers, provided that banks lead the way to secure and trusted data sharing in the new “Banking as a Service” paradigm.

Open Banking: The step forward

No doubt, PSD2 presents significant opportunities for banks to create new revenue streams, increase customer ownership and innovate the bank-customer ecosystem.

However, banks will have to face a number of challenges before being able to effectively position themselves in this new ecosystem.

Through mandated 'Open Banking APIs', data such as account information, account balances and historical transaction data will become available for external parties. 

Third Party Payment Service Providers (TPPs) will be able to offer Payment Initiation Services (PIS) to initiate payments on behalf of consumers, as well as Confirmations of Availability of Funds (CAF) to check account balances in case of card payments.

And the interesting thing to consider is that fintechs, businesses, retailers and ultimately the banks themselves wishing to become a TPP can do so in the new PSD2 world.

Through Open Banking APIs, Banks will have the possibility to offer new value added services to their old and new customers with a managed and monetizable approach. 

Co-opetition can save the banks from wasting time and money

“Banking as a platform” is a very promising concept, but complex to achieve on an individual level by a single PSP.

One of the biggest challenges that banks face is in fact the lack of a unified technical standard for APIs interfacing both PISPs and AISPs. A proliferation of standardisation initiatives by closed communities at domestic and regional level is already visible on the market, driving interoperability issues at their highest end.

On top of this, the European Banking Authority (EBA), appointed by the EU legislator to develop the PSD2 regulatory technical standards (RTS) on strong customer authentication (SCA) and secure communication, is facing continuous resistance by market stakeholders arguing that the proposed framework could hinder the goal of a level playing field among market players. Lobby and pressure from the industry might bring to looser or even more complex requirements in the future, which leads many PSPs to opt for a wait and see approach.

To avoid losing time-to-market and making iterative investments that chase regulatory changes, common architectures and business API frameworks offered in a community-centric business model, can be a way to accelerate in the right direction.

Banks/PSPs must leverage on their ability and experience in working cooperatively, designing and agreeing on projects where “co-opetition” is key. 

Fintech companies with a deep understanding and a flexible product portfolio in both cards and non-card payments, as well as a long track record interfacing interbank infrastructures and regulatory compliance, are best positioned to help Payment Service Providers and their processors/service centres adopt a layered and progressive approach to the Open Banking economy.