PSD2: The tipping point for payments?

When it comes to the revised Payment Services Directive (PSD2), it is crunch time for European banks who have a very clear choice to make. They could wait in the wings as a utility, supporting other providers’ customer-facing solutions or play a more central role in their customers’ daily lives.

The new directive has big technology implications which will lay the groundwork for a number of changes in financial services. PSD2 requires banks to grant third-party providers access to its customers’ online accounts and payment services in a regulated and secure way, and mandates banks or other account-holding payment service providers to facilitate secure access, for example through application program interfaces (APIs), to their customer accounts and data, if the account holder provides consent. As part of it, banks must also allow for customer identity verification and authentication.

When considering the impact of APIs in other industries, this new directive is likely to drastically level the payments playing field. Travel websites in particular are a pertinent example of the impact of APIs on an established sector. Through the ability to access data from hotels, airlines and cruise liners, updating in real time and providing a convenient interface for booking and ticketing purposes, the sites have relegated the High Street travel agent to a niche.

The disruption in the banking sector is expected to be just as pronounced. FinTech companies and large merchants will be able to initiate online payments directly from the payer’s bank account via a portal. This means that all interchange fees and acquirer fees currently received by banks for card transactions could be fully displaced, as could all fees received by the processor and card networks. Third parties will also be able to extract customers’ account information data including transaction history and balances – enabling new services utilising this data, for example personal financial management.

Nimble, digitally driven FinTech startups will be quick to see the opportunity to step into a void that banks laden with legacy technology might not be ready to navigate. Equally, merchants will spot the potential for faster clearing of funds and lower fees, as well as the desire to own the full customer relationship.

Accenture forecasts that third-party payment providers could account for up to 16 per cent of online retail payments by 2020, led by the displacement of up to a third of online debit card transactions and up to ten per cent of online credit card transactions. Taking the UK market as an example, there could be a total loss of more than £1.45 billion of card transaction revenues between 2017 and 2020 – money that was previously captured by the banks and card networks.

So, where is the opportunity? It is in understanding what you want to be; and being the first mover. Some banks could choose to be the utility in the background by applying a greater focus on the provision of liquidity, credit and infrastructure services that are offered to the customer through a third-party provider that owns the customer experience.

Others may choose to use the directive to their benefit and offer more services to their customers. PSD2 only mandates certain access requirements but banks could go an extra mile and extend their API development beyond the minimum requirements to retrieve additional data and provide additional functions. If a customer applied for a mortgage, a bank using APIs could connect with real estate agents, home insurance or even utility providers. This will allow the bank to receive a fee from the partner, the customer to receive a highly relevant and discounted offer, and the partner to obtain new business at a lower cost of acquisition.

Additionally, banks could well leverage APIs to enhance their offering by using purchase history to identify new demands. A simple flight purchase could prompt the bank to offer the customer a holiday loan, credit card product, travel advice, savings plans or partner referrals.

Corporate customers could benefit from basic analytical tools to predict future cash flow trends such as a potential shortfall at a future date, for which the bank could offer short-term financing or an automated cash management service. As the ecosystem expands and customer data from third-party sources is included on the online banking portal, the proposition becomes focused around customer experience and convenience.

A fully interconnected payments system will have win-win-win potential: banks will gain access to more potential customers through third-parties, merchants will improve the customer experience and possibly increase transactions and sales through convenience and lower abandonment, and customers will get better prices, better choice and better service.

PSD2 unquestionably raises uncertainties and challenges by opening the door to competition and driving fees down. But banks and other financial institutions should not ignore the significant opportunity to redefine their business and operating models to unlock new value and provide innovative customer propositions for those who are willing to leverage digital technology to lead the way in the new banking world order.

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