2018 is looking to be a year of great change for the retail banking sector as banks begin to implement the Revised Payment Service Directive (PSD2). This essentially means that the monopoly on customer account information and payment services that banks once held is under threat and will most likely come to an end. This directive renders a seat at the popular table (banks) up for grabs by any company.
What is PSD2?
In simple terms, PSD2 allows bank customers (including consumers and businesses), to use third-party providers to control their finances. What this means is we as customers could be using Twitter and iTunes to make our bill payments, make transfers as well as track our spending all with our money sitting pretty in our bank accounts. Under this directive, banks are bound by law to impart access to their customers’ accounts to third-party providers through open APIs (application program interface). This will allow these third-parties to build financial services on top of banks’ data and infrastructure, while standardising rules to allow FinTechs into the market. The opportunities are simple, the directive increases financial innovations at a time it is needed the most. It also allows increased competition in the market with new entrants entering to enhance services to the likes of you and me. However, what will happen to our ever so reliant banks?
What does this mean for banks – will the good outweigh the bad?
PSD2 will revolutionise the way banks have to operate. It is no secret that customer focus should be the top priority for banks over the coming years; more so now, given that the competition is no longer just between a Barclays and an HSBC, but any company that offers a financial service, big or small.
The directive looks to help better protect consumers when they make payments, and promote the development and use of innovative online and mobile payment capabilities, while providing a legal foundation for the creation of an EU-wide single market for payments. With this in mind, two service providers will be introduced under the new directive: PISP (Payment Initiation Service Provider) and AISP (Account Information Service Provider). PISP will initiate payments on behalf of users, services such as bill payments and P2P transfer. Whilst AISP will gain access to banks customers’ account information; the service will be able to analyse spending behaviours or consolidate various banking account information into a single overview.
The reality is that both options will cause significant economical challenges for banks. Firstly, the IT infrastructure costs will increase due to security reinforcements required and the introduction of APIs. Secondly, banks will have to provide new entrants in the form of FinTech start-ups with access to account and payment detail, allowing them to leverage client data for value adding services. This just goes to show that FinTechs could not exist without banks since they heavily rely on financial information about customers that banks have access to.
A recent PSD2 focus session at Capgemini Consulting reported that 68% of bankers fear that they will lose control of the client interface as a result of PSD2, thus weakening the position of retail banks. Additionally, 88% of banks expect to see growing competition from third party digital providers. This poses a noticeable threat on banks; the current unknown is how and whether banks can turn this threat into an opportunity or if they even consider the directive as threatening as we think it is for them. Banks could react in two ways; they could choose to accept the new directive, forming partnerships with the third party providers to share costs and innovation to create credible ecosystems. Or, banks could leverage off their other strengths and improve their quality of service, an advantage that non-bank providers do not have.
It is clear that the benefits of this directive for banks seems small and the third party providers will most likely eat into the payments piggy bank, but what is the impact of this directive on the customer or organisations?
What does this mean for customers?
For customers on the other hand, this new directive is amazing; it is exactly what we have been waiting for, transparency. Essentially, we will now have visibility of every charge included on the transactions we make. We will be able to know what the banks are charging us for each transaction and just how much of an “extra fee” is being added by our banks to carry out said transactions. Customers want a convenient user interface which provides access to all different and specialised services – almost like a one stop shop. Already, research has found that 81% of consumers use third party services such PayPal to shop online.
This reflects the advantage of this directive; it is about the cost effectiveness of consumer activity. Therefore, organisations will now have the option to opt for an alternative third party payment service, allowing them to save cost in an area that was not a viable cost saving option before.
What is next?
PSD2 directive is set to take effect in 2018, leaving banks with a little under 7 months to strategise. There is no time to wait and see what the implementation of this directive will bring. Instead, they should be proactive and treat the new directive as a spark plug to begin preparation of a collaborative and value-generating strategic engine that will bring about opportunities to their capabilities, service offerings and propositions. As for the customer, we are kids in a candy store. We are in the position to pick and choose whatever offering suits us best, we just have to wait and see if we will lean towards the banks or the new entrants to the payments market.
Natasha Rana is a Consultant in the Business Model Transformation team at Capgemini Consulting. Natasha has consulting experience across Banking and Insurance, with a particular interest in projects that are driven by business and regulatory change. Prior to joining Capgemini, Natasha worked in the media & marketing space.