The new EU Payment Service Directive is so much more than just another regulation: it is the harbinger of a digital revolution in the payments market, which is set to shake up the entire European finance market.
At the heart of PSD2 is the Access to Account (XS2A) regulation, which requires banks to enable third party access to customer accounts. This cannot help but lead to the opening up of the payments market and the emergence of many new payment providers, which will, in turn, bring with them a multitude of new finance platforms, innovative apps, and additional services. Customers can only benefit from this change, since they will be able to freely choose not only their applications, but also their payment provider.
While at first sight FinTechs seem to be best-positioned to benefit from PSD2, since the compulsory disclosure of the banks’ infrastructure will result in additional work and expense that cannot be monetized, these new competitors are for the first time also subject to regulation.
The new market entrants can be divided into two distinct groups:
- Account Information Service Providers (AISPs) – Most people have more than one account, usually at more than one bank. Checking account information or performing transactions is usually only possible through each respective bank’s portal. AISPs offer users a consolidated view into all their accounts.
- Payment Initiation Service Providers (PISPs) – Instead of a customer having to instruct their bank to act as an intermediary to pay a bill, PISPs act as a direct payment service between the customer and the vendor.
The PSD2 directive offers the possibility of developing new services for customers, other banks, and third-party companies. To ensure innovative third-party companies are not the only ones to leverage this opportunity, banks should act now to position themselves as the payment provider of choice, not only for their own customers but also for their competitors’ customers.
Adopt the “lean principles” of startups
On the path to innovation, time is the essence, and first movers are likely to dominate the market. This is also true for the current implementation phase of PSD2. The right time to experiment with and test new ideas and products is now. The flexibility needed to take advantage of this opening is not generally a strength of large banks, with their complex and often cumbersome organizational structure. To keep pace with these new developments, banks can accelerate their product development by adopting the ¨lean principles¨ of startups, such as the Agile approach. If an experiment fails in one phase of development, it does not derail the entire project. A Banking-as-a-Service model, supported by an open-API strategy, is particularly well-suited to this type of environment.
Open APIs offer many options with regard to the security and development of new services. This is where banks can really differentiate themselves from the newcomers with secure payment options and trusted bank accounts, especially if they exceed the requirements of PSD2/XS2A. To achieve this, the API needs to be flexible and equipped with multiple functions. In return, banks will uncover many opportunities to monetize their compliance investments, because every application used by the customer can also add value for the bank in form of data. The data aggregation space, for example, offers an appropriate monetization strategy for banks.
- For small and medium businesses, a transaction platform with business-financial-management applications and equipped with features such as liquidity dashboards, electronic invoice-processing, and loan management is quite possible. For the ultimate in flexibility, such a platform should also offer access to non-customers of the bank.
However, unlike start-ups, banks face an additional challenge beyond building scalable open-API architectures; they must also integrate those architectures with their legacy systems. Whether they succeed in launching new business models from the platform of compulsory disclosure will depend on how they integrate access, data flow, and data analysis, and what technologies they integrate.
Banks have appropriate functional infrastructure and a relationship of trust with many new and long-term customers. If they are able to use this advantage to develop, with compatible partners, innovative offerings based on an open-API strategy, then they could see a real competitive benefit from PSD2. Opening accounts to third-party companies is only the beginning of a profound change in the banking industry. With its recommendation to provide an “Open Banking Standard”, the British Open Banking Working Group (a national association of banking, Open Data, and FinTech experts) is setting the way for the development of the bank as an open platform.