Plans for the Revised Payment Services Directive (PSD2) did not come about quickly or without significant forethought. The plan updates the original Payment Services Directive — the December 2007 brainchild of financial regulators from 28 European countries — created to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA).
The European Commission proposed PSD2 in 2013 in an attempt to increase pan-European competition and third-party participation in the payments industry, while harmonising consumer protection and rights as well as obligations for payment providers and users.
PSD2 comes into full force in January 2018 when EU member states must transpose the directive's financial guidelines into each of their 28 respective national laws. While encouraging lower prices for payments throughout the EU, directive objectives are to drive efficiency, competition and security.
Surely, there will be challenges and unknowns throughout the early months, and even years, of PSD2 implementation – particularly as global response stirs beyond Europe and the UK.
Into the Great Wide Open
PSD2 and open banking standards have set in motion a financial service revolution, one that will connect consumers, banks, Third-Party Players (TPPs) and applications like never before. The revolution began with a mandate for open Application Programming Interfaces (APIs) and is evolving into banks' transition within a broader API economy.
Yes, revolution is not without challenges. The proliferation of TPPs — such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) — cause worry for EU banks over potential disintermediation and loss of Multi-Interchange Fee (MIF) revenue, a Pan-European interchange fee for general purpose consumer cards. Banks are walking a PSD2 tight rope as they attempt to balance risk and innovation while working to remain competitive and compliant.
Today's banking environment includes pressure to upgrade IT infrastructure to comply with regulations, as well as the threat of costly penalties for non-compliance. It is no surprise that resources are stretched at a time when the development of innovative Customer Experience (CX) solutions is so important.
Uncertainty and a lack of security standards hang over PSD2's imminent "go-live" date. For example, transposition into local jurisdictions lies in the hands of individual countries, while interpretation and implementation are up to participants (banks, TPPs, etc.). And that opens the chance of disparate business rules in each country and across the EU.
Regulations that support third-party players both redefine and level the payments' playing field, but could hinder the development of standards. Therefore, some acquirers and merchants are lobbying to use "Transaction Risk Analysis", which is more client-friendly than Strong Customer Authentication (SCA) standards.
European Union consumer interest group BEUC, which defends the interests of European consumers, is siding with the European Banking Authority (EBA). The group is set to reject the European Commission's (EC) recent recommendation to review the ban on screen scraping that allows third parties to access bank accounts on a client's behalf. The EC and EBA standoff is expected to continue, with the EC currently favouring the FinTech community.
PSD2 Success Factors: Customer-centric Cooperation, Collaboration
For both incumbents and new entrants, open banking and PSD2 are catalysts that put customer experience at the centre of business activity. And a CX focus opens an array of success-factor considerations:
- Investment in and prioritisation of innovation as banks face more and more third-party competition;
- Creation of a central registry to identify authorised service providers who can help to standardise and harmonise future policies;
- Consultation with industry organisations to identify appropriate security protocols;
- The EC might help to define interface and security standards to ensure harmonisation between solutions offered across the EU.
It goes without saying that banks will need to engage more intuitively with customers in the post PSD2 era. And that will require new processes and business models, such as:
- API Management Solutions that extend digital banking operations through application programming interfaces while leveraging these new channels to find new customers and grow revenue;
- Cognitive Offerings that allow banks to deliver one-stop, customised financial solutions based on input from artificial intelligence, analytics and other customer-learning tools.
PSD2 success depends on a value proposition that is synergistically embraced by all stakeholders—banks, third-party players and customers. The new availability of customer account information to TPPs should spur data-driven learning and new consumer solutions based on analyses of customer spending and financial health.
Agile banks could take the competitive lead in data-driven solutions by collaborating (and sharing expenses) with third-party developers to craft innovative new products and services. Customers and merchants are expecting attractively-priced banking solutions to become easier to reach, while corporations look forward to improvement in payments services thanks to increased competition. Therefore, those banks that offer the most valuable offerings — first — will enjoy first-mover advantages.
PSD2 has put customer experience center stage. And there is no better way for banks to recast themselves in consumers' eyes than by leveraging customer data (through analytic tools and cloud solutions) to create novel new products and services.
A central API infrastructure must be developed in order to realise the true value of PSD2. An API framework that is integrated with instant payment solutions while addressing direct access and accountability will lower banks' implementation costs and potentially accelerate benefits for all stakeholders.
By Christophe Vergne, Payment Solutions Head at Capgemini Financial Services France and Jan Dirk van Beusekom, Executive Director BNP Paribas Cash Management.