EXCLUSIVE – After more than two years of planning, Payments Services Directive II or PSD2 finally arrived in Europe on Saturday. The regulation has been dubbed as one of the more substantial regulatory changes of its kind in Europe.
While many traditional banks and FIs might not be thrilled about having to open their APIs to non-bank payments service providers, others, including many fintechs, are rejoicing the possibilities it brings them. But perhaps the group that benefits most from PSD2 are the customers with a plethora of new options, new technologies and solutions to choose from when it comes to payments.
But what does the directive actually mean for fintechs? And what is its impact on the overall payments landscape? Bank Innovation spoke to some industry experts, and here are the top four things to keep in mind about PSD2.
PSD2’s mandate requiring banks to open their APIs to fintechs provides a more potent ground for collaboration than before, according to technology services provider Synechron’s David Horton, head of innovation.
“The regulation is facilitating partnerships,” Matthias Setzer, Chief Commercial Officer of payments processor, PayU, told Bank Innovation.
And although many banks like BBVA, HSBC, and Santander have already realized the importance of partnerships for innovation, others will be encouraged to seek partnerships to improve their products and offerings.
PayU’s Setzer’s said: “Fintech was supposed to be taking over from banks: now we know that it is not that easy and both fintechs and banks have a role to play. Not all banks will survive, certainly not in the classic format. And of course, many fintechs will also disappear – some very strong ones, potentially truly market changing and disruptive, will survive. I dare to predict that at least most of those will have strong partnerships in place.”
That could even mean partnerships with major tech plays like Google and Apple, Horton said, who might not want to deal with the “regulatory compliance of becoming a bank, but might have a lot of banking services to offer.”
Banks Could Initially Lose Some Money:
“Banks have expressed these concerns,” Setzer told Bank Innovation “And of course there will be an impact on their business model.”
Both Horton and Setzer agree that there is likely to be some revenue attrition for banks because of certain partnerships.
One example Horton gives is the regulation’s impact on PISPs or Payment Initiation Service Providers. In this instance, open banking will enable non-banking services across the board to pull a user’s funds directly from their bank account as opposed to their debit card. This will eliminate certain fees associated between bank and merchant, thus causing some level of revenue attrition.
Another likelihood is a heightened level of competition between banks: not only will open APIs make onboarding new customers easier for banks but it will also make the same data available to all players, thus allowing banks to use the information to provide competing services at competitive rates.
But there are also beneficial relationships banks can establish because of PSD2, according to Horton, who said it will allow banks to broaden the scope of products and services.
Horton gives the example of a small bank previously unable to provide its customers with insurance, that can now do so by connecting to a larger bank’s open API. This also enables that larger bank to offer its underwriting services to that smaller bank, thus creating a symbiotic relationship.
Good News for the Consumer:
While Synechron’s Horton thinks the customer is likely to experience the benefits of PSD2 over a long-term period rather than immediately, the general consensus is it will promote innovation and make more data available, all of which will translate into a better customer experience.
In an email to Bank Innovation, Louise Beaumont, strategic advisor at consulting firm Publicis.Sapient and co-chair techUK Open Bank Working Group, said:
Consumers and small business can now start to benefit from a hyper-personalized environment, with predictive and preemptive services that dynamically flex and flow as financial needs change, and all based on the willingness to securely share the data they generate. That is vastly different from the financial services experience to date with monolithic banking products that are mass-marketed with no consideration to the individual.
PayU’s Setzer, said, “PSD2 is a regulation that is centered around the consumer and their ability to ‘take control.’ With so many innovative solutions already on offer to the consumer, the added advantage of them now also being in control of their data gives banks an even bigger reason to stay ahead – to be in constant need of innovation. With growth and scale at the heart of most fintech startups and innovations, it’s likely banks will feel the pressure from a revenue point of view. It is they who will benefit the most from strategic partnerships. Enabling them to cater to consumer needs, whilst also benefiting from their legacy processes…. If anything, PSD2 should encourage one thing across both the fintech and payments space: to embrace innovation.”
PSD2 may be revolutionizing payments in the EU, but globally its impact may not be so uniform.
To PayU’s Setzer, some countries have advanced beyond PSD2. He points to India, Argentina, or even Brazil as notable examples.
On the other hand, there are markets like that of the Middle East, which according to Synechron’s Horton are not yet ready to embrace open banking because the major banks are not willing to relinquish certain functionalities to partnerships, especially not with fintechs.
As for the U.S., Horton explains that while there might be companies like Betterment or Acorns already using open banking, others in the U.S. are in fact looking to PSD2 to guide the way.
In the end, PSD2 merely reflects the changing payments landscape globally.
“It’s important not to forget that regulation is a global trend,” Setzer said. “So, while all eyes will be on Europe for the coming months, it’s important to keep abreast of what’s going on with the rest of the world.”
PSD2 was first passed in 2015 by the Council of the European Union.
To learn more about the latest developments in European fintechs and fintech regulations, join us on March 5-6, 2018 at the Parc 55 in San Francisco for Bank Innovation 2018. Click here to request an invitation.