PSD2: A game-changing directive for retail banks

PSD2 is an EU directive that puts in place a set of new rules for payment services.

May 23, 2018

Paying bills straight from your bank account through Facebook? This is what PSD2 will bring. PSD2 is an EU directive that puts in place a set of new rules for payment services, aiming at making international payments within the EU as easy, efficient and secure as payments within a single country. 

In a nutshell, PSD2:

  • Aims to Secure e-Payments & expand the financial services ecosystem
  • Covers payment service providers 
  • Demands strong customer authentication
  • Opens bank data to 3rd Parties through APIs

Considering the evolving technologies in the payments landscape, the directive seeks to open up the payment market to new players leading to greater competition among banks, fintechs and other actors. Added to this, the aim of PSD2 is to foster innovation by introducing new types of services for the consumers and fix the gaps in the existing legislation in order to enhance customer protection and increase transparency. PSD2 covers a number of payment services including:

  • Enabling cash deposits and withdrawals
  • Execution of credit transfers, standing orders, direct debits
  • Payments through cards or similar devices
  • Issuing of payment instruments (examples cards, wallets) and/or acquiring payment transactions
  • Money remittances
  • Payment initiation services
  • Account information services

Regardless its legal applicability in each country, PSD2 is a framework that changes the way banks operate and offer their services and the way consumers evaluate their relation with their banks following usability and tech trends. It is therefore clear that banks will no longer compete against other banks, but to all organizations offering financial services.

From banks to banking

Back to 1990, Bill Gates had wisely stated that although banking is necessary, banks are not. The new directive opens up the EU payment market to companies offering payment services based on access to information about the payment account, particularly:

  • Account Information Service Providers (AISPs) which allow a payment service user to have an overview of their financial situation at any time, allowing users to better manage their personal finances. Moven is such an example. 
  • Payment Initiation Service Providers (PISPs) which allow consumers to pay via simple credit transfer for their online purchases, while providing merchants with the assurance that the payment has been initiated so that goods can be released or services provided without delay. Sofort is such an example. 

According to a recent study published by PwC, 68 percent of bankers worry that the new directive will lead to less control over their clients, whilst at the same time feel uncertain how to respond to the challenges it brings. As a consequence, they are following a “wait-and-see” strategy, in comparison with third-party providers and FinTechs that are already embracing the possibilities of open banking aimed at winning a predominant position in the emerging payments arena.

The consumer trust

With the consumer becoming more and more digital, all of the existing and emerging providers do not have any other option but to quickly and effectively adjust their strategies accordingly. The increased competition might eventually result in tech-savvy consumers turning to a mix of service providers instead of a single bank for all their financial needs. The consumers are asking for instant, more personalized and more convenient experience. And if they don’t receive what they expect from their financial provider(s), they will easily switch to competition, just like with every other purchase they’re making. However, we also need to bear in mind that security consumers are equally concerned about the security of their information, and, depending on their profile (age, technology adaption etc), most of them would rather feel safer with a “traditional” bank compared to a fintech.

An opportunity or a threat?

It could be a serious threat for the banks that decide to take no action regardless the existence of local regulation to comply - somebody else, either a local or a global player will do it. So it’s not a matter of “if” but a matter of “when”. On the other hand, PSD2 is an opportunity to transform and differentiate for the banks that choose to leverage the PSD2 framework and implement innovative services for their customers staying in front of the fintechs, and, most importantly, protecting their most valuable asset, the end-customers. 

To comply or to compete?

Open banking will definitely revolutionize the payments value chain. In order for the “traditional” banks to be competitive in this new era driven by PSD2, they shall focus their digital strategy on transforming a simple financial transaction into a means for engaging, personalized customer relationships. As there is no universal answer on how to strategically address all these challenges, banks must develop modular solutions that use APIs to connect data, products, and services drawn not only from across the financial services sector, but also from other sectors. In doing so, they will capture customer insight and transform it into ever more compelling solutions.

Banks can act as aggregators and offer “Account Information Services” to their customers and provide Personal Financial Management services. Banks must see collaboration with Fintechs as an opportunity to use APIs to integrate them into their banking platforms in order to offer new services based on data analytics. As access to account information for payment services is opened up, banks also can extend their reach in Retail Payments by extending their services as PISPs. Implementing a flexible IT architecture which will enable the provision of services beyond access to account information is crucial for the transition. Instead of being pure play payment processers, banks can move up the value chain by offering online Payment Initiation services straight from their web or mobile channels. 

The key takeaway: As Klaus Schwab (Founder and Executive Chairman World Economic Forum) puts it "In the new world, it is not the big fish which eats the small fish, it’s the fast fish which eats the slow fish".

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