As of the start of 2018, banks will be required to share some kind of customer data with third parties, which are often thought of as highly innovative fintech companies. But banks and emoney institutions will also be able to assume the role of third parties themselves and access each other's data, which is something not so many people consider.
We all know that banks sit on tons of valuable data about their customers and what they are doing in ecommerce, but they have always been very concerned about using that data for data protection reasons. By contrast, large ecommerce platforms use our personal data for all sorts of things. Now that we are basking in an AI and machine learning summer, perhaps it's time banks got fully immersed in that world.
Speaking at Citi's recent Digital Money Symposium, Ruth Wandhofer, Citi, global head regulatory strategy, said: "Banks are actually saying - 'oh, so I am encouraged to use my customers' data and do something with it, and think about interesting, innovative value-add solutions for my own customers that all these years I thought I couldn't do because of data protection issues.'"
Wandhofer, an expert on PSD2, is seeing momentum in the retail space where banks are thinking they might develop some third party-related services, and because they are banks they can also extend credit and all sorts of other fancy things on top, she said.
"I think that game, where banks can really start playing with their customer data and access another bank's customer account, is something that maybe some regulators haven't even thought about," said Wandhofer. "But it is necessarily implied because banks are highly-regulated entities. I hope that we will see a lot more innovative solutions from the banking side now that we know that we can actually play with the data we had all this time."
However, uncertainty about exactly what sort of data will be opened up makes it tricky to determine what business models can be banked upon.
Also on Citi's PSD2 panel, Eric Tak, ING, global head of ING's Payments Centre, said: "Although huge opportunities will come about, if I were a third party and were actually also initiating some real innovative services ourselves, outside the ING organisation, it's not as easy to build your proposition on this because the actual data you might get from different banks, the history about it, might be different.
"For example, there is a possibility for banks to exclude so called sensitive payment information, from the information they supply to third parties. However, what sensitive payment data encompasses is not completely clear. It makes it hard for any third party to have a coherent customer proposition based on that."
Screen scraping and regulation
PSD2 is generally hailed as a highly innovative and forward-looking regulation, but it was also catching up with a screen scraping tradition that was happening with third parties in a completely unregulated fashion.
As a result of general dissatisfaction with the card payments system, third parties emerged offering payment initiation services. Screen scraping business models evolved whereby third parties, unknown to the paying customer, were looking into their account and data mining information on the account and perhaps offering real time credit to the customer, say, if their bank balance was low.
Wandhofer said: "A whole business model evolved without any regulation and PSD came along and said we need to think about these business models which have come out in the past few years and bring them into the regulatory fold."
Another way to frame the regulation is that consumers and merchants were beholden to a system that was costly and stifled innovation. Eva Kaili, MEP, who was also on the panel, pointed out that the cost of fees from the banking sector in the EU when it comes to doing transactions is about €130bn.
Kaili said: "PSD2 is mainly about providing customers a better experience and allowing innovation to happen. We can save on costs and make it faster, better quality and also provide safety that will improve all transactions.
"If I can give you just a couple of numbers: the cost of fees from the banking sector to any kind of transaction, only for EU, it's about €130bn. So this can be really reduced a lot and save a lot of money for other things.
"People have lost trust; the traditional system didn't provide them with safety net that they needed, so now they are trying to enter into new technologies. That means a new system they can trust with less intermediaries, better access and cheaper, safer, faster transactions," she said.
'Cardmageddon' – an exaggeration?
One thing that's talked about a lot is whether PSD2 will lead to a big increase in account to account payments at the expense of the card networks. PSD2 in combination with Instant Payments and the Single European Payments Area could be the missing piece of the puzzle that will really provide a credible alternative to card payments. There are also the likes of Amazon and big ecommerce platforms, which seem likely to push this paradigm shift.
Much will depend on how the card schemes react and develop. We have seen Mastercard bid for VocaLink to create different sorts of network. In addition, the interchange regulation has made card payments significantly cheaper for a lot of merchants particularly in the online space, as opposed to the fee levels of three to five years ago.
Eric Tak said fears over cardmaggedon might be over-played: "I think that account to account payments can play a huge role. But I think the card networks still have a large advantage in the sense that they also in particular cases supply what's known as 'level two' and 'level three' data, which is not normally a part of credit transfers we know today.
"Interestingly, also we will have to consider that we know those card-on-file transactions that we currently have; we won't be able to execute them as easily or with the one click pay if they are payments over €30.
"So that will trigger a debate on can we actually leverage direct debits, which are not regulated in exactly that sense, to play a similar role to what cards are doing today.
"So apart from doing the right stuff and innovating for making card payments more efficient and secure, we are also investing a lot in seeing what we can do on account to account payments - definitely."