Backbase Whitepaper / PSD2: Making it actionable / June 2018

PSD2
Making it actionable

Financial institutions across Europe will soon be introduced to new banking industry regulations – a proposal for a revised directive on payment services in the internal market, better known as Payment Services Directive (PSD2).

The PSD2 regulation is regarded by many as the single biggest change in the banking industry, as it will force banks to open their infrastructure to third parties. Many banks are concerned about this legislation, feeling exposed and under attack from new entrants, as well as by the position of customers in the driving seat. But does PSD2 need to be seen as a threat to banks?

Fintech providers now have a chance to become an Account Information Service Provider (AISP) themselves. PSD2 isn’t simply a compliance project – it can be used to your own benefit.

 

 

PSD2 will impact how we access our finances

PSD2 will impact how we access our finances

Before PSD2

Labor intensive task of getting complete overview of financial status across banks.

  • You have multiple debit and credit accounts with various banks.
  • You have to log in separately for each of them, but have no single view.
  • It is very hard to have a real overview of your net worth.

 

 

 

After PSD2 adoption

Account Information Service Providers (AISPs) can offer direct insight in all products and transactions across banks.

  • Now it’s possible for third-party, new fintech players, and existing banks to build a tool that aggregates the data from all the banks in one single view.
  • Your account information, all your financial products and all your transactions can now be consumed in one single dashboard.
  • The term Account Information Service Provider (AISP) could be applied to third parties like mint.com that can aggregate all the account information, but banks can become AISPs themselves and provide this single view of the data.

PSD2 will impact the flow of payments

PSD2 will impact the flow of payments

Before PSD2

PSD2 calls on banks to give third-party providers (TPPs) such as fintech companies, other emerging banks, retailers and telcos secure access to customer accounts (with customer consent). The opening of the payments market to new providers will widen consumer choice, lower transaction fees and improve convenience.

The new regulation represents an opportunity for TPPs to hasten change in the banking industry, aggregating financial products and services into more digitally friendly versions. These are businesses that enable customers to access different online banking accounts, including credit cards, current and savings accounts using a single online portal, and fintech companies moving into the payments sphere.

After PSD2 adoption

Other organizations, such as retailers, telcos or utility companies, could also offer their own payment platforms (becoming Payment Initiation Service Providers, or PISPs), reducing commission fees, strengthening customer relationships and positioning themselves as identity providers. This is actually already taking place.

Some technology brands focused on gaming are taking an interest in the financial services industry. These brands, for example Microsoft Xbox, are already taking some margin from traditional banks in the form of cash float. Many of these gaming platforms have a ‘wallet’ feature, where value transfers can be accepted from mainstream payment platforms. Would these also be new entrants in the market?

APIs as the answer to PSD2

The impact of PSD2 on banks

A major concern for banks is being prepared for PSD2 from a technological point of view. Banks are being asked to allow access to customer accounts by third-party providers (with the customer’s permission). To do this, banks could create their own APIs to enable connection with third-party providers.

Alternatively, banks could “take a step back from the customer and allow their infrastructures to facilitate transactions, while consumer brands (such as Apple, PayPal or new players) engage with customers directly”

Before PSD2:

Before the implementation of PSD2, banks have access to large quantities of data, payment engines, international payment networks; they are connected and they can provide services directly to their customers. In the digital world banks do this typically through their own APIs, referred to as an Enterprise Service Bus, or an API gateway. This internal data, functionality, and payment capability is used by traditional online and mobile banking applications. The only way for the customer to have access to this data is through a branch, call center or online/mobile app, from which they can access this data and these functions.

 

After PSD2:

Once PSD2 has been implemented, the bank will need to provide the data and functionality to their own apps via an internal API or Internal Service Bus, but they will need to expose payment capabilities and aggregated information in a so-called public API.
API stands for Application Programming Interface, a technology that allows developers to access functions of different computer programs and make them work together. With PSD2, you will not only need to have an internal API, you will also need to have a public API.

 

 

APIs as the answer to PSD2

APIs as the answer to PSD2

Providing consumers with unprecedented choice, flexibility and ultimate control changes the playing field, and provides banks with an incredible opportunity to define and distinguish themselves on the strength of their customer experience in a way that wasn’t previously possible. The ability to be able to view accounts from multiple banks in a single customer experience shouldn’t be underestimated.

 

DEF psd2 Integrating FinTech Capabilities grey - PSD2 whitepaper

 

Banks also have the option to integrate third-party APIs to enrich their omni-channel banking experience. Banks will not have to own everything themselves – they will be able to rely on the fintech capabilities of partners.

Fintech players will not only be competing with the banks but will also be partnering with the banks. This will enable banks to enrich their product portfolio. End-users will not only be able to buy products that banks already have from their core systems but also products provided by third-party players banks have partnered with. This creates a shared business model as well as a shared revenue stream.This is a major part of the API economy, as banks will not have to own everything themselves. They will have the possibility to partnering with third-party specialists, and reselling their capabilities within their own brand and within their own customer experience.

 

 

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