Digital innovation

PSD2 – The digital opportunity is here, take it!

Insights, Viewpoints, Thought Leadership |

PSD2 – Remind me, what’s it all about?

Payment Service Directive 2 (PSD2) builds on the 2007 directive, creating an open payments market across the European Union. The directive on Payment Service (effective as of 2009) provided the legal foundation for the creation of an EU-wide, single market for payments (aka SEPA). In 2015, the European Commission defined a revised directive on Payment Service to enable modern, efficient, and inexpensive payment services and to enhance protection for European consumers and businesses alike. The new rules intend to better protect consumers when they make payments, and promote the development and use of innovative online and mobile payment capabilities. As European legislation, PSD2 is now mandatory to be implemented as of January next year (2018) for all banks operating in the European Economic Area – which comes to a total of more than 4,000 financial institutions. There are three major components to PSD2:

  1. Strong authentication and secure communication – required in three situations, online access to the payment account, initiation of electronic payment transactions, or actions carried out via a remote channel that may imply a risk or fraud or other abuse
  2. Third party provider regulation – PSD2 extends the definition of payment institutions by introducing new types of service provider. Now Account Information Service Providers (AISP) and Payment Initiation Service Providers (PISP) are also included within the scope of regulated entities.
  3. Access to payment account (XS2A) – under PSD2, all registered PISPs, AISPs and all licensed Payment Service Providers (PSPs) are to have access to payments accounts held at ASPSP (Account Servicing Payment Service Provider, i.e. bank) under explicit consent of the client. ASPSP must share all data enabling the AISP or PISP to perform the service requested by the client. PISP/AISP may not use, access or store any data for other purposes than provision of the requested service.

Ask yourself the following: Why should a customer go to a bank’s site, the argument goes, when a third-party aggregator can pull all of the customer’s accounts, from all of his financial providers, and display them in one central place? Or balance different accounts to optimise available cash liquidity to avoid unfunded accounts? or rules-based payments investment to automatically invest into a government bond or overnight interest facility (if interest rates would only be where they used to be)?

Undoubtedly, for many there is a clear answer to this question. And various surveys conducted in 2016/17 indicate amongst consumers and corporates likewise the preference to use a bank for such service – but nevertheless there is also an openness to potentially use third parties (non-banks) in near future.

 

Getting set to make the most from PSD2 – missed opportunity, or maximum business benefit?

Yes, PSD2 with XS2A is indeed a regulatory burden. And, yes, it does open the door to the threat of new competition from new market entrants. But its real milestone significance for established banks is as a driver for payments innovation, solutions creativity and enhanced services and experiences for customers. In summary, PSD2 triggers the ability in banks to become content originators as well as data holders and handlers putting a deadline on the digital transformation of banking.

To realise the real potential PSD2 has to offer, however, demands that banks pass through the gateway today – now – by developing and delivering the business models that will reassert their position both in the payments space and through an innovative range of new operating models to best serve current and potential clients. When looking at how banks have been responding to deal with PSD2 we see three models / behaviours emerging that could well also be represented by using animals to characterize:

  • Passive PSD2 (the chicken) – Implement necessary technical and functional requirements to become compliant and to deal with account information (AI) and payment initiation (PI) process requests from external TPPs.
  • Active PSD2 (the fox) – Additionally establish own external TPP with a build-out customer value ecosystem. Just like in the concept of emergence (formation of new features or structures of a system due to the interplay of its elements) an orchestrated and curated combination of PI and AI functions across banks can create entirely new business “structures” providing new customer servicing models, enhance existing products & services, and build our new core products.
  • Beyond PSD2 (the wolf) – includes all of the above (active & passive PSD2) and additionally build out APIs beyond PI and AI (so instead of payment services only, provide access to all banking services) as well as create an technology-enabled, collaborative focused business entity that by combining / orchestrating / curating all underlying banking functions and features (as well as any given other third party feature/service) create new super structures to step up to a next level of value creative emergence – beyond PSD2.

Many institutions are just implementing regulatory minimal solutions and thereby acting more or less like the chicken – maybe not knowing that the fox is always at the door and eventually will come by to take business. The wolf is an entirely different predator on the upper side of the food (value) chain being able to attack a large variety of prey (business).

No matter in which status an organisation would see itself it should become obvious that further exploration beyond PSD2 has already started with examples like Bank (platform) as a Service #BaaS or banks offering corporates and institutional clients “proprietary” APIs for investment management, transaction banking, trade services, etc. – an active PSD2 strategy seems thereby the minimal approach to actively defend ones existing business stake and client base in the wake of an uprising innovative competition – yet hardly to measure but surely to expect.

 

In case you are interested to learn more how to get your head around on Active PSD or Beyond PSD feel free to contact our experts and also check out our supporting consulting and change offering on PSD2 called PSD2 ONE-STOP-SHOP

 

Note: No animals were been harmed during writing of this post. Selection of animals was based on a European sample set (as the topic is PSD2) – otherwise, the wolf would have been a lion of course.

Published by: Bernd Richter