This fundamental piece of payments-related legislation in Europe aims to accelerate digital disruption and re-shape of the banking industry.
With fintech incumbents still on the rise and the implications of open banking driven by PSD2, banks are faced with new challenges but also exciting opportunities.
A quick introduction to PSD2
PSD2, or the revised Payment Service Directive, came into effect in January 2018, replacing the initial PSD from 2007. Issued by the European Commission (Directorate General Internal Market), it has been designed to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). Its wider purpose is to promote pan-European competition and participation in the payments industry also from non-banks, and to provide for a level playing field by harmonizing consumer protection and the rights and obligations for payment providers and users.
In short, PSD2 will enable bank customers, both consumers and businesses, to use third-party providers to manage their finances. As Open Banking begins to develop and evolve, this directive enables fintech companies to build applications on top of data from banks. This would make it possible, for example, for you to use your Facebook app to pay your bills or analyze spending habits.
The technological core of PSD2 is believed to be open APIs, which can provide the means for banks to connect their payments and data services to third parties. However, the regulation doesn’t mandate a specific technology, which means that common standards can be agreed on that aren’t necessarily standardized APIs.
Sahana Hussein, HSBC’s head of open banking via
Even though the Directive has already come into effect, things are not changing just yet. To enable compliance with this directive, the European Commission also issued a Regulatory Technical Standard that will only come into effect in November 2019, giving banks some time to be able to address a series of economical challenges that go with it, including how to remain competitive in the face of technology-enabled innovation.
How banks can remain competitive
Objectively, this is a great step towards the wider digitization of payments and the creation of better, more relevant financial services for digital customers. But it also means that banks will no longer only be competing against banks, but against everyone offering financial services. As more non-banks will be entering the market, traditional banks may find it increasingly difficult to differentiate themselves.
However, this provides banks with the unique opportunity to move faster and better than other incumbents, given their extensive financial experience and customer insight. By creating a compelling digital banking experience, they could increase their relevance tenfold by following consumer trends and building smart business platforms.
Building solutions for digital customers
Accenture’s 2017 Consumer Banking Report revealed that nearly half (48%) of customers want relevant advice and product information at their fingertips as they go about their daily lives. For example, they want banks to send them information about the best mortgage deals when they are in the process of buying a property, contextual information that many banks currently do not provide.
Consumers are expecting speed and convenience from their bank, just as they do from their tech apps. They expect tailored advice, and they want it all on their own terms. Advances in artificial intelligence and machine learning technologies are opening the door for banks to provide effective automated support as an additional route for digital customers to access personalized information and guidance.
Card-linked offers are a good example of personalized banking services, where banks can share with retailers a database of consumer spend in their retail sector, enabling the merchant to offer a whole new reach of customers significant discounts to bring them in.
Building smart business platforms to drive innovation
A new direction in technological innovation requires a systematic approach that starts with a bank’s business model , their digital operation model and the overall goals they want to achieve. Designing and implementing new digital services requires a smart business platform that can
connect the complex back office environment with the front office and unify the digital experience for both the bank and its customers.
The continuous accumulation of IT systems over the years has created technology estates that are vast in scale and complexity in most established banks. In current market conditions, where returns increasingly depend on lower cost-income ratios, the cost burden of maintaining these estates is a real challenge. This underlying legacy architecture is often inhibiting innovation and responsiveness to new digital competition.
Before tackling API development and integration to comply with the PSD2, banks should take conclusive steps in the direction of newer, smarter business platforms that not only will help them be data-sharing ready and privacy-enabled, but also make them more competitive in the new financial market landscape.
“The real challenge for banks is that they have to connect to their complex back office environment before they are able to work on implementing open APIs. This is something that fintechs do not have to do, resulting in a much faster and more efficient integration process than banks.”
Hans Tesselaar, executive director at Banking Industry Architecture Network (BIAN) via
At TJIP, we believe business platforms are the perfect foundation to keep up with the fast cycle of innovation. We’ve created the “Smart Platforming Model,” for funding, developing, and maintaining complex high-risk software environments. Our model supports all steps in the business platform lifecycle, all with the purpose of putting people front and center and eliminating complexity.
The “Smart Platforming Model” offers a proven process, geared towards integrating legacy systems and applications from internal and external market entities and driving business transformation, which is exactly what established banks will need in the years to come.
There is little doubt that this new open banking environment will be a great win for the digital consumer. Whether banks will choose to accelerate their innovation efforts, or partner up with third parties to create these new digital ecosystems, the need for a smart business platform will remain.
Tech giants are not losing momentum with these new changes. In fact, cited as one of the biggest self-perceived threats to the banking sector along Apple, Facebook and Amazon, Google has recently unveiled a new unified payments service, which brings together Google Wallet and Android Pay, saying it is more interested in partnering with banks than replacing them. The question is what do banks want to do?