The revision of the Payment Services Directive aka PSD2 will change banking as we know it. It will increase competition and foster innovation and in the first part of our in-depth analysis we provided an overview of the new rules as well as the changes it is going to bring. Now, in the second part, we will focus on the actual consequences PSD2 will have for incumbent payment services providers like traditional banks and disruptors such as FinTechs and the Tech Giants.
How will PSD2 affect traditional banks?
It’s a crucial moment for traditional payment services providers like banks. Clients are increasingly comfortable with digital services and a growing number of transactions take place on mobile devices. Clients demand real-time, personalised and seamless payment experiences. With PSD2 incumbents will now be required to make customer data accessible to third parties through the opening of banks’ application programming interfaces (APIs), potentially fuelling the growth of their new competitors. Banks face the threat to be reduced to merely provide the underlying infrastructure, similar to utility providers that simply run the cables and tubes through which the resource flows. If a bank lets this happen, it will eventually not be able to cross-sell other financial products to its clients as well as loose access to important customer insight and data.
But there are also opportunities stemming from this disruption of the status quo:
As a first step, traditional payment service providers need to consider how to monetise the access they are required to give TPPs. One option could be to develop systems that provide access to data levels that go beyond the requirements set out in PSD2. Secondly, nothing keeps banks from providing the same services as FinTech disruptors, i.e. become an AISP or PISP itself. And thirdly, become more of a bank of old by providing an inclusive platform that connects merchants and consumers with the bank, offering better products and services that address both financial and non-financial needs by making good use of the access banks have to large amounts of valuable data, and place itself at the centre of a client’s daily transactions. For example, a bank should know best of a client’s or a customer’s business’ financing needs. Analysing this information and then providing the customer not only with initial funds and financial planning, but also connecting to external providers, is a way to create additional value.
Another option, of course, is always to seek to collaborate with the disrupting forces. In fact, the number of partnerships between incumbent payment service providers and FinTechs is growing.
At any rate, banks will need to act now to avoid losing further terrain to FinTechs and other disruptors. It is a chance to build on existing relationships and use those as an advantage against their competition, but they should not rely on the believe that people may not embrace change.
An example from another highly regulated industry, telecommunications, might give hope to the traditional players though: under pressure from telecoms competitors and new threats in the form of disrupting technologies, former national telecommunication companies like Deutsche Telekom or British Telecom managed to successfully evolve their existing business models with new products and services while regulatory pressure opened the market through open interfaces. As its traditional source of revenue, traditional telephony became more and more redundant, BT, for instance found new sources such as broadband and TV (e.g. BT Sport and BT TV). The same could be true for traditional banks that can charge less and less for traditional services, but can compensate by delivering new ones that are places the bank deeper in the business process of their customers and thereby creating a better range of services.
What does it mean for FinTechs?
PSD2 aims to promote innovation and it is likely that we will see more FinTech newcomers as a result. It will also open the door to new products and services. A prominent example is the aggregation of accounts of AISPs mentioned above. As a first step, it will make it possible to view all accounts of a user in one solution rather than several applications since providers will be able to access all the data and combine it. As a second step though this will allow analysing a user’s spending patterns, expenses, financial needs in a user-friendly manner, and use this information to better service customers.
In this regard it is important to bear in mind though that the Directive compels PISPs and AISPs not to use, access or store any data for purposes other than for the provision of the payment initiation service or the account information service as explicitly requested by the payer. This initially sounds like a significant stumbling block for FinTechs seeking to develop a more comprehensive business model as TPPs may therefore extend their offering solely where requested by the client. Considering though the growing popularity of digital banking services it doesn’t sound too far off that clients may actually seek additional services as part of a one-stop-banking solution.
On the flip side, as with all FinTech endeavours, the new entrants will have to deal with existing and new regulation and might find this more burdensome then incumbents. Thus, traditional banks may have an opportunity to leverage their resources and experience in respect of compliance and relationships with regulators as a competitive advantage. While some regulators like the FCA try to provide start-ups with the possibility to test their solutions in a sandbox environment, this only goes so far and compliance can be an expensive aspect of doing business. Several startups providing TPP services have already complained about the regulatory burden that is felt even stronger by smaller institutions with limited resources like early stage FinTechs.
The authorisation process TPPs have to undergo in order to offer their services are only the start. On-going compliance obligations need to be considered, too.
Last but not least, if the real money lies in extending a TPPs services beyond the initial PIS or AIS activities, substantial funds will be required to grow the business accordingly. Something many start-ups often struggle with, which is another reason why some of the newcomers should actually contemplate teaming their solutions with a traditional institution that has the necessary resources.
How about the Tech Giants?
PSD2 is also a massive opportunity for the big tech companies like Apple, Google and Facebook to further move into financial services. Facebook already allows for money transfers through its messenger app if you connect a US debit card to it. While it still requires the bank to transfer the money in traditional ways, it shows Facebook’s ambition. Google offers with similar services through Gmail, while Apple’s and Samsung’s payment and wallet services through mobile devices. Amazon has been offering loans to its market place vendors for almost two years now.
The bottom line is that these tech giants are slowly but steadily making their way into financial services. Taking advantage of the opening of account information to further integrate payment services into its platform is just the next logical step. Given the large amount of data these companies hold on their customers, they will also be better prepared to offer tailor-made financial services to them.
A recent study showed that more than a third of people surveyed said they would consider technology firms for banking services. This shows that for traditional banks the trust argument when it comes to the use and security of customer data is only of limited value despite recent cases of data breaches and theft at, for example, Yahoo! and LinkedIn. With the percentage of the population that actively uses digital services and is comfortable with this new environment, the trend is that things are rather getting worse than better for the incumbents.
Conclusion
The above presents only a glimpse of the various aspects of the PSD2. Not for nothing has it been branded as regulation that is game changing. We will look in more detail into some of these aspects over the coming weeks, so make sure you check in on us regularly or sign up to our newsletter in the top right corner of this page.
If you missed the first part of this article, you can find here.