A quick glance at the revised EU directive on payment services PSD2 is enough to make a financial institution baulk, but on close inspection there are some excellent opportunities. – By Sujatha Venkatraman, Temenos Payments Product Manager , Peter Ryan, Payments Compliance Product Manager
It’s no surprise that the general mood of banks towards PSD2 is one of nervousness. With a looming implementation date of January 2018, they must prepare for a European Union directive designed to bring down costs for consumers and open up competition at a challenging time.
A low interest rate environment is hitting margins; new entrants processing online only and payment services such as PayPal and Apple Pay are looking like a force to be reckoned with. Increased regulation is adding cost; and revenues are falling but that’s not all, as some of PSD2’s technical standards, have yet to be settled and might not actually be thrashed out for months to come.
Focusing on all these negatives is causing many to lose sight of the opportunity. In fact, PSD2 will allow banks to break into new areas, add revenue streams and cut costs. Yes, the unknowns are cause for some nervousness, but plenty of the detail is already set out. We know what the workflow will look like and banks can use this to start building. But the preparation needs to start now or banks will flounder.
Opportunities: Open access = new entrants & services
At the heart of PSD2 is the requirement for banks to offer free access to third parties of the basic customer data they hold. If a customer tells a bank to share information externally, it must comply. The idea is that open access will increase competition and make it easier for account holders to compare accounts and move their money. Increased competition should bring down costs while the open access will allow new services to emerge – offered by the banks themselves and by new entrants.
Opportunities: Capitalize on enhanced data
One potential new revenue stream enabled through the PSD will be monetizing data. While basic account data must be freely shared, banks can charge for offering enhanced data that has been analyzed and sorted, adding to its value.
The bank must have the business insight at the senior management level to help guide this strategy. With this in mind the business and IT departments must work closely together to ensure a balanced, well considered strategy. Indeed, this may account for the recent rise in banks appointing Chief Data Officers, for example, to ensure they can balance efficient accommodation of data regulations such as BCBS 239, EU General Data Protection Regulation (GDPR) and PSD2. After all, data is now the differentiator in the customer relationship and will be where the battle for the customer is fought. It makes sense to have someone in charge of this that can deliver on the new opportunities.
Opportunities: Get in the payment initiation game
Perhaps the biggest opportunity will come from offering a payment initiation service, cutting out some of those entities involved in card transactions. While credit cards and services such as PayPal currently charge 2-3% of a transaction’s value to facilitate the payment (debit cards are slightly lower), banks offering this service directly will be able to undercut that and still make a profit. This is possible by reducing the number of parties between consumer, retailer and the bank.
Retailers who like the idea of avoiding the high charges of the credit card providers but don’t have the facilities, experience or scale to set up their own payment initiation services will be looking for partners. This really is a big opportunity for banks and will open up a whole new revenue stream.
Leveraging the opportunities
Making the most of these opportunities will demand an advanced digital strategy with the board’s backing. PSD2 means the strategy now has to be omni-channel and it’s more important than ever to be part of the connected world where Apple and PayPal already have first-mover advantage. Banks need devise their strategy roadmap by looking at what their offering would be – loyalty and retention through improved customer experience, monetizing of big data in product/consumer offerings, becoming acquirers by offering Payment Initiation services.
Delivery will come down to the use of APIs. They are a relatively simple way to enhance banks’ service and offering in line with PSD2 and will allow banks easily and cheaply to sell more products and offer advice.
But this open access and sharing information must all be done securely, which is one of the biggest challenges banks face, along with the need to future proof any systems against further regulatory changes – remember it was only eight years ago that PSD2’s parent PSD was introduced.
Finally, PSD2 will result in a massive jump in the number of transactions coming directly into a bank and in their complexity. All this data will need to pass through banks’ firewalls quickly and without hiccup. These systems must be robust and fast enough to cope.From a payment point of view payment hubs seem to provide a solution to leverage these opportunities. A payments hub reduces the systemic risk in the inherent complexity of multiple systems because it enables systems to be consolidated. In fact, if a hub system operates using rule-based conditions, full data integrity is ensured and that any changes and errors can be addressed automatically, without the need for recoding, thus greatly reducing risk and the need for expensive testing. Banks and their corporate customers therefore reduce the likelihood of systems downtime, an issue that we have recently seen. This idealistic universal approach may be out of reach for some banks at present however, it should not be dismissed as this is what the future will hold: ‘If I were building a bank from scratch, I would want to be able to see a bank in a common way and how it is tied together’ says Andy Schmidt from Tower Group ‘It’s a lot easier to manage certainly from a security standpoint in terms of fraud and AML. Certainly easier to manage from a liquidity perspective, because I can see everything that’s going on, instead of having dark corners that I might miss but it is a different kind of banker that would see that value.’
It’s a big ask, but the technology is out there along with the skills and experience to leverage the opportunities that the PSD present. But banks need to make sure they have the strategy (and technology) in place to make sure they are in the best position to receive the full benefits and seize the moment.