By Chet Kamat, Senior Vice President, Oracle Financial Services Global Business Unit
Introduced in 2015, PSD2 grants third party providers (TPPs) access to bank customers’ (both consumers and businesses) online account & payment services in a secure and regulated manner. This most recent iteration of the payment services directive should make European payments even safer, but that’s not without adding significant hurdles that banks must clear along the way. Via PSD2, the European Commission seeks to drive competition and innovation whilst enhancing consumer protection and the security around internet payments and account access.
So what does a PSD2 world look like? The directive currently helps provide a foundation for a single market for payments. TTPs will provide consumers the ability to connect to their bank accounts, allowing the services through an API to access data generated by their bank account. Banks will essentially become a platform for banking while providing APIs to access data. This access enables the provision of two new and distinct types of services; Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs).
In other words, under PSD2 a third party will be able to initiate payment to a retailer, directly from the customer’s bank account via an online portal. This cuts out the extra step of retailers needing to receive payments through a customer’s bank. Significantly speeding up the process, PSD2 will grant AISPs access to a customer’s bank account information data, which includes transaction history and balances.
What does all of this mean for the retail banking industry at large? Well, according to Accenture, nine percent of retail payments are predicted to be lost to PISP services by 2020. Additionally, IT costs (particularly when delivered by a traditional on-premises environment) in order to enable the required API access and the resultant security enhancements, will increase.
Almost certainly, we can anticipate increased competition in the financial sector, as PSD2 will enable the introduction of new entrants into the market. New products and services will be available for customers to choose between, rather than receive all their requirements from one bank.
What should banks do?
Banks have enjoyed extensive periods of high customer retention, thanks to being the sole custodian of customer data, a fairly competitor-less run and limited requirement for embarking on innovation. The landscape has changed drastically with Digital driving increased customer expectations, which banks’ complex IT environments struggle to deliver against.
- Act now
Now is the time for banks to act. To ensure long-term survival banks should either actively develop their own digital ecosystem or explore external ecosystems. Due to the complexity of retail banks’ existing IT environments there are significant challenges in delivering the innovation that fintechs are currently offering. This can be addressed by creating a completely new environment within the bank, unshackling itself from the current innovation inhibitors. Saxo Payments, for example, is actively pursuing a banking-as-a-platform strategy, and is looking at third-party apps to extend this platform.
A recent visit to Norway provided an illustration of how banks are being more innovative and launching compelling customer services. One of Norway’s leading banks has developed a unique mobile payment platform. Launched in 2015 it is now the country’s largest payment application open to customers of any Norwegian bank. Part of its appeal lies in its ability for the user to make payments to a receiver’s telephone number rather than an account number.
Building for the future makes banks more competitive in their existing market, increases their appeal to both customers & fintech partners alike and presents future competitors with a tougher entry barrier. Banks can cement their position on being the preferred service provider for multiple financial services in the future.
- Monetise Data
PSD2 threatens to disrupt the exclusive relationship that banks enjoy over their customers’ transaction data and how this data is reported back to them. AISP services will enable third parties to analyse and capitalise on this data, gaining significant insights into spending patterns and behaviour.
Banks can capture and analyse this data more effectively now, offering value-added services to their customers. Such enhanced services will help reduce the risk of third parties attracting customers with their own data aggregation services. With experience, banks could develop a market for these analytical services, growing their data mining and API development offerings.
For example, a bank in the U.K. has launched an online service to help small and medium sized businesses glean insights and usable information from big data. The service is designed to aid the analysis of transactional data collected by SMBs and to measure their performance against similar businesses in the region. Businesses will be able to spot trends in cash flow, and see information on average customer spend and whether payments are made by cash, debit card or cheque.
- Partner & Collaborate
The introduction of PSD2 alters the competitive landscape for retail banks. Rather than competing on unfair terms, especially when it comes to responsiveness, banks have the opportunity to partner with fintechs. Banks and fintechs can each draw on each other’s respective strengths to build truly enhanced customer experiences. For banks, fintech collaborations enable access to agile and timely innovation capabilities. For fintechs, banks provide significant customer bases, large-scale infrastructure and large data volumes. Each party can focus on its core strengths, and enjoy the shared data and costs.
A U.S. based bank, for example, is working with an online small business lender. Together they are building a new product that will provide online small-dollar loans to the bank’s clients. A combination of the bank’s relationships and lending experience with the business lender’s technology platform offers an innovative credit product with a streamlined application process – almost real-time approvals and same- or next-day funding. This approach results in market-leading functionality and service at dramatically reduced costs and time-to-market.
Employing these approaches will not only prepare banks for a PSD2 world, but should intrinsically increase agility at banks. With consumers better protected by this new regulation we can expect more cross-border payments conducted in a streamlined, safe manner – the onus is on banks to maximize value from this opportunity by acting now rather than later.