What is PSD2 Compliance, and What Does it Mean for your Business?
EU’s Payment Services Directive (PSD2), in effect since Q3 2018, opened innovation opportunities for established payments organizations. Capturing this disruption and harnessing its advantage is about going more profound than its commoditization features.
What is PSD2?
With the global trend of emphasizing security, transparency, and market competition, PSD2 requires banks to provide other qualified payment-service providers (PSPs) connectivity to access customer account data and initiate payments. This legislation comes to level the playing fields for new market entrants and has the potential to transform the banking landscape irreversibly.
Additionally, with this directive, the European Commission wanted to make the payments space safer, protect consumers and ensure lower prices for payments.
Arguably, PSD2’s most resounding impact will be the opening up bank-held customer data to Account Information Service Providers (AISP). Compared to its 2007 predecessor, the act covers Third-Party Providers this time around. Once the AISPs increase their traction, banks risk losing their ownership of the customer interface.
PSD2 and Open Banking System
There are two prominent differences between the terms most used interchangeably.
An additional complexity layer emerges as individual banks may offer their available data through varying technical measures.
First, PSD2 doesn’t mandate creating common API standards. Secondly, PSD2 opens up access to customer transactional data for regulated PSP institutions. But UK’s Competition and Markets Authority (CMA), on the other hand, may grant access to a broader range of third parties through its ‘whitelisting’ process.
Impact on Incumbent Banks
As customers find it easier to ‘shop for price’ and switch providers, the inherent risk for incumbent banks is commoditization. This could mean anything from losing market share to dipping profit margins. Moreover, using the data, PSD2 incentivizes third parties to create new value propositions that meet unmet needs bringing banks’ primary relationship with their customers under threat. Consequently, the possibility of higher customer churn is sure to create a more considerable market disruption, favoring new entrants and nimbler competition.
PSD2’s Positive Implications for Banks
The earlier section may suggest so, but not everything is downhill. The incumbent players have much at stake, from revenues that come from new products to services to the opportunity to gain market share from other banks to providing technology platform services to other banks (API management).
The mentioned scenarios allow these long-standing institutions to retain their customers’ trust, control their data, and redeem their roles as financial anchors.
Agile organizations that bring patient capital investments to fructify innovative products and new business models will seize the PSD2 momentum.
A McKinsey survey reports that 35% of bankers say that FinTech’s will beat the small and medium attacker banks (30%) to disrupt the payments market.
Focal points in the PSD2 Adoption
Along with mitigating the fraud risk by implementing advanced controls (advanced analytics is an example) and adopting pre-emptive tools for triggering cyber-attacks, banks would look beyond the PSD2 compliance mandate. The PSD2 implementation opens up a new window to build processes, onboard new skill sets, and realign the in-house data infrastructure around richer analysis and insight generation. There is no better time to craft growth strategies for new revenue stream creation and exploit data-dependent use cases across retail, corporate, and other institutional businesses.
What does it mean for your Business?
For retail banking, the use cases range from account aggregation, peer-to-peer payments services, consumer-to-business payments, product cross-selling, lifestyle offerings, and identification and authentication services. These retail use cases spring 360-degree offerings – from self-administration benefits, mobile money, and POS transfers, identify lending or investment products and enable services beyond payments (like alternative payment forms).
PSD2 for corporate banking professionals offers similar high stakes. The use cases of balance sheet simulation, multi-account management, integrated cash management, and enhanced risk scoring have game-changing implications for multi-account aggregation, cash pooling, liquidity management, and robust lending practices.
In the light of PSD2 implementation, banks must define their leadership ambition and conduct comprehensive use-case evaluations. When done with a change mindset, these organizations will recognize the genuine potential of their in-house data (customer touchpoints). These insights would then help the incumbent to leapfrog their competition.
Banks must collaborate with innovative tech partners creatively by being the first movers in building a customer-focused finance-based ecosystem.