PSD2 to the Rescue — New Era in Payments
Payment Services Directive 2 will increase innovation and competition in the European payment industry
I’ll trade you a cow for some bushels of wheat. No, you only need a bit of cow? Fortunately, innovation in payments has brought us way beyond this old school method of conducting trade, however, significant problems still exist. High fees, fraud, and privacy issues are major pain points for consumers or merchants; banks and other old guard payment systems need to solve these quick before fintechs eat that lunch.
In Europe, there’s a specific date for transition to a new payments model, January 12, 2018. This is the implementation date for PSD2 (Payment Services Directive 2). The major change is the requirement for banks to open up access to customer accounts, allowing third-party providers to access that information via APIs (application program interface). This signifies the dawn of open banking, where a whole new host of financial products and services can be built on top of the existing bank infrastructure and data.
As we are talking about a fundamental change in the whole payments framework, how this shakes out is still up in the air. Banks have to not only figure out a compliance policy, but more importantly, a competitive strategy that will guide their technology, partnering, implementation, pricing and product roadmap going forward.
Tom Blomfield, CEO and Founder of Monzo, states, “PSD2 has the potential to up-end the retail banking market, forcing each product to stand on its own two feet. This will lead to increased competition and price compression.” On top of those changes are a whole host of other regulatory compliance changes as well other fintech issues to consider; a busy time indeed, but also a significant opportunity.
New Payment Opportunities
For just as fintechs might be able to eat their lunch, the banks can compete and eat other banks lunch. That’s the beauty of open markets and open competition; the best services, the best interface/technology/customer service/pricing can rise to the top. There will be whole new levels of the payment stack to compete on:
- PISP (Payment Initiation Service Provider)
Providing bill payment, money transfer and other payment services
- AISP (Account Information Service Provider)
Providing aggregation and analytics on multiple accounts
However, the potential for change is just that — potential. Just because people can get bank services from other sources, will they actually change the way they bank? Many people are resistant to change and, especially when it comes to money, are unlikely to change their banks over a few euros. They have built up a relationship, built up the trust and new entrants might find it hard to compete.
Leveraging Customer Relationships
As with any market, the actual product is only one element of success. Brand awareness, effective communications and other tools of marketing are a major factor in determining who wins the battle for wallets and purses. And, this is one area that the incumbents have an upper hand in many cases.
If the established banking players take advantage of the new offerings to actually improve their relationship with their customers, why would the consumer risk changing to a new bank? People do want convenient mobile banking. People do want to have clarity about rates and offerings. People do want better ways to manage their money.
Banks can use existing customer relationships, new opportunities of #PSD2 to deliver better range of services. They’ll need to examine their fee structures and lower many to compete, while making it up on the new services and lower costs enabled by fintech.
Robert Langley, Enterprise Architect, Payments at National Australia Bank, observes: “If banks can embrace third party capabilities from fintechs and others and formulate these into customer solutions, then this provides an opportunity to more deeply embed themselves in customer business processes and to make those processes more efficient and less costly to execute.”