Change always brings with it a mixture of excitement and apprehension. When the change is profound and systemic, as the revised Directive on Payment Service (PSD2) promises to be, the competing emotions are more acute. Many wonder whether this will be a revolution or evolution, incremental or epochal change, chipping away at the entrenched positions of established players or unleashing forces of disruption that threaten to sweep them aside.
Our view is that, while the degree of transformation will vary market to market and platform to platform, PSD2 will in every case be disruptive – in some areas radically so. We see that, after a slow start, financial institutions are increasingly shaping up for the challenge. The uncertain, cautious mindset that was prevalent as banks initially considered how to respond to the new directive has, progressively, been dispelled. Many now admit that their first instinct, to turn inwards and focus on a narrow compliance agenda, was unnecessarily defensive. Instead, they are taking the front foot, mapping out a business response to threats and opportunities; looking to engage as well as to protect.
That shift in attitude is, in part, founded on a recognition that PSD2 will accentuate and accelerate trends that are already identifiable, rather than ushering in an entirely new banking paradigm. It is important to recognise that the enhanced transparency and flexibility that will characterise the PSD2 landscape is best seen within the context of the wider movement towards 'open banking'. Banking leaders are already grappling with the challenges of an increasingly fragmented ecosystem; they have long recognised the need to respond to the challenge from digital entrants, and endeavoured to upgrade their own digital interfaces, making them more customer-friendly and intuitive. Now they will need to move much further and faster. Although change that builds upon existing foundations might not look as alien and destabilising as it first seemed, the reality is that far too many banks are inadequately prepared, and will struggle with the necessary adjustments.
As the implementation of PSD2 approaches, there is also a greater understanding that the impact of the directive will vary significantly depending on the characteristics of the market where it is applied. Variations in consumer behaviour will be a critical factor. One should expect countries where customers are already willing to share data, bank with more than one institution or use mobile/online banking platforms to be more fertile territories for significant change.
Variations in the regulatory landscape will also have a material impact. UK regulators, who are frequently castigated at home for having done too little to shake up a high street marketplace that is dominated by a handful of big banks, plainly view the implementation of PSD2 as an opportunity to inject greater competition and thereby respond to their critics.
At the heart of PSD2 is a drive towards far greater availability of data – specifically the ability to access customers' transaction data where they grant consent through open and standardised Application Programming Interfaces (APIs). Where customer data was previously available only to the customer's main bank, under PSD2 it becomes democratised: a "public good".
Banks that actively engage with their customers in this process, persuading them of the benefits that sharing their data will bring, will be far better placed to harness change to their own commercial advantage. They will be able to seize the opportunities that flow from the ability to better aggregate and analyse customer information; they will work with their customers, rapidly developing more targeted, personalised and attractive products. Alternatively, a bank that relies on its traditional "main bank advantage" is ripe for disruption from challengers who are free to exploit information that was previously the main bank's preserve.
Much disruption will come from banks themselves: institutions that are worried about the threat from the digital upstarts may be missing the more immediate threat. Instead, they may find that their day-to-day competitors, (often more digitally savvy than they are given credit for) are the ones not only with their eyes on new market share, but also with the greater immediate ability to seize it. Existing market conditions are a key factor – fintech will be a major disruptor where it already has a significant foothold, but it will not conjure a financial revolution overnight in markets where it lacks a substantial presence.
The other area that will see significant disruption is payment initiation – particularly as PSD2 coincides with the move to instant payments. Initially, the big changes will be felt in e-commerce and in-app payments, both areas where significant innovation is already taking place. Following hard on the heels of the entry of digital giants into the payments space, this will accelerate market fragmentation. Banks who are weighing up how to cope with the existing pace of change may well conclude that the best way forward is to collaborate with other banks or card networks. Faced with the global reach and muscle of Apple et al, it would be a brave business indeed that chose to go it alone.
In the journey towards open banking, PSD2 is an important milestone. It will unsettle and disrupt those who aim principally to preserve the status quo. The financial services marketplace will become more competitive under the new directive, but existing players' inbuilt advantages should not be discounted. Customer loyalty and trust – sometimes built over years and even generations – is a valuable commodity indeed. Coupled with flexibility, foresight and ambition, it will leave many existing financial institutions well placed to prosper.
Stefan Dab is global leader of payments and transaction banking, and Maarten Peeters, global segment manager for transaction banking at Boston Consulting Group (BCG)