With six months to go until the directive comes into force, it is time for banks to start asking themselves some serious questions, says Leonie Mercedes
The countdown has started. At the time of publication, it’ll be just over six months before banks are required to comply with the Second Payments Services Directive (PSD2). The directive requires that by January 2018, banks must grant third parties access to a treasure trove they’ve been sitting on for decades – their customers’ data, as well as payment infrastructure. The change is a bonanza for fintechs building disruptive apps and services, while from the banks’ perspective, this could be alarming – they’re about to lose their monopoly on customer information. But as bobsguide finds, PSD2 offers incumbents a wealth of opportunities, as long as they’re on board.
The banks’ initial reaction to PSD2, which was adopted in January 2016, wasn’t entirely positive. According to research by PwC, based on interviews with 30 senior executives from leading banks in mid-2016, there was a “mixed, but mostly negative, perception of PSD2”. Eighty- eight percent of the executives “believe that PSD2 will affect their business, but they are far less sure about the specific implications and ramifications of PSD2 or what their response to the directive should be”.
Evidently, there is some uncertainty, as well as concern that the directive will cut into the banks’ business. An influx of new businesses is expected to enter the financial services market after PSD2 comes into force, undoubtedlyincreasing competition, says Sophie Guibaud, VP of European Expansion at challenger bank Fidor. And it won’t just be the third-party providers (TPPs) and fintechs: “While the regulations theoretically mean that any company can get in on the act, the biggest threat could come from established technology companies who already have a large audience.
“For example, if Facebook decided that it wanted to provide a dashboard tool in which all of an individual’s financial information was available at a glance, then it would get significant traction.”
Kanika Hope, Strategic Business Development Director of Retail and Corporate Banking for software provider Temenos, says that it is widely believed that the change will lead to banks losing their direct relationship with the customers. However, she adds, banks have the upper hand in that they, unlike their non-traditional competitors, possess the critical ‘three Cs’ – customers, compliance, and capital. “[They also] still hold customers’ trust,” she adds.
Daniela Eder, cash management business development manager of treasury services at BNY Mellon, agrees: “TPPs and fintechs have a great deal to offer the payments space in terms of new technology capabilities, but they lack the experience and client trust that has been long established by banks.”
Hope continues: “PSD2 provides banks with a unique opportunity, should they choose to exploit it. In order to protect themselves from the risk of disintermediation, banks should respond to the directive by not merely complying, but by exploiting the directive to create new business models aimed at creating new and deeper relationships with customers and at generating new revenue streams.”
However, banks must be proactive, she adds.
Your mission, if you choose to accept it
According to Hope, banks can respond to PSD2 in one of three ways: simply complying with the directive, monetising access to additional data and insight beyond what is stipulated by PSD2, or becoming an account information service provider (AISP) or payments initiation service provider (PISP). She cautions, however, that banks that decide to merely comply are in danger of becoming a utility, while the customer experience could become owned by the third parties.
To avoid losing relevance and fading into the background, one of the second options is the way to go. So what should banks be doing to ensure they succeed, or flourish, under PSD2?
According to Eder, there are two things that banks need to do: “Firstly, banks will need to be agile in order to be able to adapt quickly to the fast-moving environment. Secondly, a client-centric strategy is paramount.” Application programming interfaces (APIs) can be beneficial as a means of addressing both of these strategic approaches, she adds. “Not only are they extremely flexible, their customisable properties and ease of integration are redefining the way in which banks, clients and third parties interact.”
Preparation for the implementation of PSD2 has been underway at BNY Mellon for some time, Eder says. “We cannot say for certain exactly how the landscape will unfold under the new legislation, but flexibility will be a primary focus of our internal PSD2 review.
“[We will be] making sure that our services and solutions are malleable and able to easily accommodate further market developments around PSD2 – and indeed market developments in general – while at the same time being compliant with the new regulation.”
Eder says that although guidelines specifying exactly how banks will interact with TPPs have not yet been published by the European Banking Authority, it is likely that data will be shared via APIs. APIs allow for the effective, efficient exchange of data, and their adaptability makes then particularly useful tools for updating and enhancing systems and solutions, Eder explains.
“Furthermore, their seamless and open integration allows banks and clients to work together far more closely on the development of new services and solutions – meaning banks can provide more customised, client-centric solutions.” If used right, APIs can be like Miracle-Gro for startups.
Uber’s rapid expansion from start-up to global company can be attributed its integration of partner capabilities via APIs, according to PwC. For example, it uses the Google Maps API to find customers and track drivers, Google’s Cloud Messaging API for messaging, and PayPal’s Braintree for payment. Accordingly, BNY Mellon has launched NEXEN, a cloud-based ecosystem that integrates solutions and data from BNY Mellon, its clients and select third parties, including fintechs.
“We currently have over 100 APIs in our API store, which will update and grow in alignment with changing client needs,” Eder explains.
An open API architecture is a core part of Fidor’s operating system. “[It] enables fast integration of third-party offerings as well as data exchange with connected partners,” Guibaud adds.
Meanwhile, fintech Token offers an open banking solution that aims to address some of the pains of payments, such as poor security, lack of speed, and high cost, with a crypto-based security model with money and an open API. “We enable online merchants to connect to any bank through a single interface,” says Marten Nelson, co-founder of Token.
2 + 2 = 5?
Bringing down the walls and allowing banks and fintechs or TPPs to talk to each other more freely with APIs, as PSD2 promises, will have a transformative effect on fintech as a whole. And more than simply being a marriage of convenience between the parties, it promises great gains for both camps, as well as for the consumer.
Eder continues: “PSD2 will affect banks’ business models and will require them to think about where in the payment chain they can add value. But while PSD2 is shaking up the industry in terms of competition, importantly, it will be a catalyst for innovation and collaboration between banks and TPPs/fintechs. Such partnerships marry the strengths of both parties and thereby can optimise the payments experience for clients.”
She adds that combining skillsets through collaboration between banks and TPPs or fintechs will not only help expedite the development of new concepts, but will help to ensure that the end-to-end payment experience is tailored effectively to meet the needs of the client. “[PSD2 offers] challenger banks the opportunity to provide superior banking (account aggregation and payment services) through modern, state-of-the-art mobile apps that are designed to delight the end customer so as to ultimately acquire the primary banking relationship,” Hope continues.
“It also affords challenger banks and other fintech providers the chance to forge symbiotic partnerships with incumbent banks, taking advantage of the banks’ compliance prowess and large customer bases, to augment their own agile technologies, methodologies and mindsets.”
Banking opens up
PSD2 represents a giant leap forward toward the open banking standard. Guibaud says that in many ways, it will be a great leveller, “giving challenger banks and fintech companies an equal chance to create services that offer customers every financial service they require while keeping their brand front-of-mind”.
“Consumers will benefit from an increase of new added value services,” Nelson says, adding that we will see developers build new apps and services that help consumers make better decisions about their finances. Though with greater access comes greater risk, especially in the context of financial services.
Nelson continues: “Unfortunately, there will also be third parties that are looking to scam consumers. Therefore, having the right security and anti-fraud measures in place will be critical for banks.”
Eder predicts a wider impact on payments, though what that might look like isn’t entirely clear just yet. “Indeed, we may soon find that the role of the bank has shifted from providing the historical banking services that we have become accustomed to. We may all be using alternative services – such as a PayPal account or similar – to complete our transactions for convenience.” Guibaud concludes: “PSD2 is going to be one of the biggest shake-ups of banking regulations in Europe we have ever seen.”
However, she adds, “it could also lead to some of the more established names in the industry being decimated if they don’t move quickly enough”.