The banking landscape is set for another shake-up in the form of the new European directive, Payment Service Directive (PSD2).

terchoo  /   February 7, 2021

Created to expand the concept of open banking PSD2 brings about benefits to both the consumer, in the form of better security and greater choice of financial provider, as well as the banks through streamlining the transaction process. Following form PSD in 2007 this new directive is presenting banks and the financial services industry with an opportunity for digital transformation and the potential for new market propositions. Occurring alongside another EU directive, General Data Protection Regulation (GDPR), banks now have the chance to better understand the data flows and processes within their organisations to better serve consumers new rights surrounding personal data. The combination of both directives gives banks the choice in whether to simply comply or to use it as a source of competitive advantage.

PSD2 regulation is focusing on the opening of payment infrastructure and customer data of both consumer and businesses to third parties in the form of Payment service providers (PSPs), as long as they have the customers permission. It is the EU’s move to encourage competition and innovation as well as improving security processes around consumers, their internet payments and account access. Set to disturb the current value chain in place PSD2 will see Fintech’s expand their reach into this area through the removal of ad hock data sharing agreements and compulsory data sharing becoming the norm, while banks need to pivot to exploit these changes. The go live deadline however was on January 13th 2018 and has now been transposed into national law of all EU member states making it a pressing matter for banks to address.

One major challenge banks will have to face from this disruption to their industry is the likelihood of losing market share to AISPs and PISPs. These being Account Information Service Providers and Payment Initiation Service Providers both being the main third parties gaining the access to the banks consumer data as they are the new clearly defined Third-party Payment Provider (TPP). The potential shift to these operators is not something to be ignored with one Accenture survey stating 50 percent of customers will use a PISP product which offers both extensive and secure options. In addition, it states how 1/3 debit and 1/10 credit cards will move to a PISP by 2020 showing just how dramatic the shift in the industry could be exposed to. Many banks are facing the challenge in keeping their place as intermediaries in internet payments as PSD2 threatens their position there if they do not manage to adapt their position in the market.

Following on from this, banks are likely to see fewer chances for customer interactions leading to fewer opportunities for cross selling, with third parties being the main driver in this from the disruption to the market and the more streamline payment services which will be put in place. Banks risk becoming a utility layer within the financial services industry providing the data and infrastructure to start ups to build new innovations.

Banks will have to make large scale IT changes if they are to comply with the PSD2 regulation which is a complicated task in itself. Given the fact many banks use old systemsand not the modern IT architecture needed to allow third parties to use APIs necessary for this data collaboration. With this implementation comes with it a new dimension of security risk for banks to deal with as they provide the services for the transfer of money from customer accounts. Viewing this overhaul as an administrative challenge to say the least is made more testing given the other European directive which came into enforcement in May 2018 being the General Data Protection Regulation.

The span of challenges PSD2 is confronting banks with is immense and not something to be taken lightly given the new levels of competition they will be facing. The streamlining of the payment process will certainly cause some banks to fall behind but it must be noted that if navigated strategically banks could use the PSD2 directive to gain competitive advantage. Moving on this sooner rather than later will allow for first mover advantage and hopefully avoid as much of the disruption as possible while getting ahead of the competition which will only have had since January 2018.

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