PSD2: What will change and how should banks react?

By Bragi Fjalldal | 27 April 2017

Bragi Fjalldal, CMO and VP Business Development, Meniga

The revised European Payment Services Directive (PSD2) is driving European banks to a defining moment in 2018. PSD2 signals a significant shift in the balance of power in European retail banking, opening the door to innovative FinTech companies and setting the financial services industry on a journey towards open banking. Specifically, PSD2 aims to drive increased competition, innovation and transparency across European payments and account information markets by granting third-party providers (TPPs) regulated access to a customer’s online account data and payment initiation. With PSD2, the consumer decides who can access their data and authorise payments from their accounts.

What is PSD2 all about?

The Payment Services Directive, is a European Union Directive, administered by the European Commission to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). The first version of the directive, the European Payment Systems Directive (PSD), introduced in 2007, aimed at establishing a modern and comprehensive set of rules applicable to all payment services in the European Union. The goals were efficiency, innovation, cost reduction, and to open up the financial industry for new players and technologies.

The revised version, PSD2, is set to enter into force within the European Union in January 2018. The main goals of the revised version is to contribute to a more integrated and efficient European payments market, improve the level playing field for payment service providers, make payments safer and more secure, protect consumers and encourage lower prices for payments. Furthermore PSD2 will push the boundary of open banking across European Union and bring more control over personal financial data in favour of the consumers. At it’s core PSD2 will impact two things: the flow of payments and how we access our finances.

How will PSD2 impact the Financial Services Industry?

PSD2 aims to drive increased competition, innovation and transparency across European payments and account information markets by granting third-party providers (TPPs) regulated access to a customer’s online account data and payment initiation. Banks will bear the cost of compliance with no room to shift costs to third party suppliers or consumers. By breaking from the current banking monopoly, the payment services market will benefit from increased innovation and free-market competition.

Once PSD2 has entered into force, banks will need to expose payment capabilities and aggregated account information in a so-called public API (Application Programming Interface). This signals a significant shift in the balance of power in European retail banking, opening the door to innovative FinTech companies and third party service providers and setting the financial services industry on a journey towards open banking.

Fintech companies and tech giants such as Facebook, Google and Amazon will benefit from enhanced and regulated ability to build financial management and payment services applications. Consumers will benefit from access to more innovative financial services and banking across financial institutions will become more commonplace. Banks will need to comply and come up with answers on how to compete in a post-PSD2 reality.

How should banks react?

As PSD2 draws closer, banks are beginning to plan for compliance. API level access to account data & payment initiation requires banks to rethink IT architecture.

But viewing PSD2 as a pure compliance exercise would be a big mistake. PSD2 offers commercial opportunities for all players in the financial services industry and banks must take advantage. With all the noise about fintech disruption and competitive threats, banks need to remember that they still have a competitive edge — most notably due to access to customers and financial data at scale. This advantage is slowly eroding, so the time to utilise it is now. No matter what, PSD2 will be a significant investment for banks and it is important to make that investment count.

In my view, there are three critical steps banks should be pursuing in anticipation of PSD2.

Step 1:  Build a Best-in-Class Open API Platform

Building a best-in-class API platform means going beyond PSD2 requirements and build a personal finance data innovation platform with access to more data & functionality than just accounts, barebone transactions & payment initiation. Additional API functionality could for example include enriched (categorized, merchant mapped) transaction data, customer demographic & broader financial product holdings & transaction based marketing intelligence data. With such a platform in place, banks have several options on how to deploy such an innovation platform to develop new business models and extend the digital customer experience through partnerships. Several banks have already taken significant steps in this direction, a good example is BBVA’s API Market.

Step 2:  Be a first-mover with “post-PSD2“ products & services

PSD2 is regulating access to data and this will increase demand for data-driven, personalised services & customer experiences. Banks are in an excellent position to take the lead prior to PSD2 by developing data-driven “post-PSD2” products and services and capturing first-mover advantage. At Meniga we feel a sense of urgency in the market from banks to make pre-emptive moves to test out “post-PSD2” customer experiences & business models. We see a growing demand for white label data-driven banking products & services, such as our personal finance product and account aggregation services. As a concrete example of recent moves in this direction, Santander Spain recently launched their MoneyPlan app in Spain, a state-of-the art, notification-driven PFM solution that aggregates financial data to provide a holistic view of people’s finances. ING recently announced the launch of an independently branded PFM solution based on aggregated data in the UK — Yolt. 

Step 3:  Use Data to Expand the Banking Ecosystem

The time has come for banks to start thinking out of the box and define their role more broadly. To date, banks have been hesitant in using their competitive advantages to expand their business model — but with PSD2 around the corner, the time to move is now. Card Linked Offers are an excellent example of how banks can use data to develop a compelling proposition to personal and corporate clients at the same time. Using transaction data to source compelling offers tailored to each customer’s spending profile — granting merchant access to valuable customer segments and serving the personal banking customers relevant offers in the context of everyday banking. Bank of America was a first mover in this space in the US and many of the major UK banks are now pursuing this as well, including Lloyds and Santander. Another example of how banks can use data to build new products and revenue streams is transaction based market intelligence. Banks with reasonable market share have the ability to supply their corporate customers with real-time market share data & store level analysis — a unique strategic marketing tool. Nedbank launched their MarketEdge market intelligence platform in South Africa last year and are marketing this towards their corporate customer base.

In summary - by utilising banks’ data, beyond just compliance, banks can integrate with innovative products that add true value to their customers, to maintain market share and enhance their role in consumers’ lives. An investment in a partner such as Meniga helps banks invest in compliance as well as truly compete in the market by providing innovative services for customers.

By 13 January 2018, Member States will have to implement PSD2 and banks, consumers, fintech companies and large tech companies interes    ted in financial services can all benefit from this regulation. The most important takeaway from PSD2 is the increased transparency and movement towards open data which will continue to innovate and modernise our society.