Another new year and another financial deadline, one which has the potential to significantly impact the banking marketplace for both financial institutions and their retail customers. This time it’s the second Payments Services Directive (PSD2), which comes into force on January 13th, with the aim of promoting security and transparency in retail payments processing, whilst effectively opening up the banking sector to licensed third parties.
PSD2 will create a level playing field for all payment-service providers, breaking the banks’ monopoly over user data and in turn creating more competition across the financial services sector, whilst also improving security and fraud prevention. If implemented correctly, it will enable a variety market participants, such as FinTech firms, retailers and social media platforms, who have previously struggled to add value to customers due to rigid banking structure, to directly engage with them – hence the term ‘Open Banking’.
Open Banking, made possible due to the introduction of PSD2, will allow retail customers to view their bank accounts, payments accounts and bills in one Application Programming Interface (API) through a third-party provider. Account holders (the consumer) will have to give prior consent for this to take place or to allow third parties to initiate payments on behalf of customers. Open Banking will therefore give consumers more control over their data, while also supporting an emerging market of new third-party products and services, such as tailored price comparison websites.
So, what does this mean for the European banking system?
In response to Open Banking, Brickendon believes there are several potential strategic responses open to banks, whereby they build their own external API for payment initiation and account information as mandated by PSD2; operate as a TPP with value-added services to avoid losing complementary add-on business; or operate as an open API platform, not only building the APIs that are mandatory for PSD2 and acting as a TPP, but also providing additional APIs to the developer community or FinTech companies to leverage internal expertise and remain ahead of the game.
While there are obvious pros and cons to each of the above options, the key is to adopt the strategy that best aligns to the size of the bank’s retail transaction banking business and the maturity of its technological architecture. Any institution that generates sizeable incomes from its’ retail banking business will have an increased incentive to use the PSD2 framework to drive innovation to retain its retail customer base and associated transaction volumes. Those with sizeable transaction banking businesses and an average-to-high IT maturity level, should initially focus on meeting the deadlines for PSD2 regulation, while simultaneously designing an actionable high-level API strategy across the bank.
Once compliance is achieved, these banks should begin to ramp up efforts to selectively implement revenue-generating solutions through APIs, either by operating as a TPP or looking for partnerships with API and service innovators. In the longer-term, banks should ideally look to operate as an ‘open’ platform, possibly by creating an “App Store” for non-regulated APIs, whilst in parallel designing robust and scalable business models for API monetisation.
What does it mean for the consumer?
Obviously, increased consumer choice brought by the introduction of alternative payment methods from the non-banking world such as PayPal, iDEAL, and SoFort, is never a bad thing, however the lack of oversight as these protocols have proliferated is something that PSD2 seeks to address. From mid-January 2018, all new disruptive and innovative payment platforms will therefore be brought under one regulatory umbrella.
PayPal first provided APIs as early as 2010 and API enablement has been instrumental in its widespread adoption as a payment method. The ensuing widespread introduction and adoption of APIs across the financial services industry has progressively challenged the concept that banks own their customers’ data.
In addition, there is a move towards the idea of ‘open data’ that gives customers the right to use their own transaction data and account-related information to procure products and services from financial institutions other than their account-servicing banks. API technology is therefore driving radical changes in the way both service providers and consumers think about innovation.
With the deadline for PSD2 implementation already upon us, and the idea of Open Banking no longer a thing of the future, the structure of the financial sector, and in particular payments services, is set to change. As usual, institutions – not necessarily limited to traditional banking service providers – that think about the changes outside of the demands of immediate regulatory compliance and place customers at the core of future service innovation are likely to emerge as the winners.