PSD2 and its effect across EU and far beyond

In today’s day and time, when a person orders a pizza from a restaurant via UberEats, they can track the step-by-step update, from restaurants accepting the order till time the food is delivered at your doorstep. That is such a trivial thing, which we are tracking most of our days.

Have you ever thought about the same concept applying to international bank transfers or wired payments? When a cross-border payment is initiated, once the transaction leaves the bank, a customer doesn’t know at which stage the transaction is. In case, the transaction is not processed because of any reason; it is going to be an expensive and cumbersome task to track down the transaction.

What if we tell you that this cumbersome and costly task has already been simplified? How? With PSD2. The regulation asks the banks to implement reconciliation and tracking capabilities via new APIs (2) to formulate streamlined data and minimize cost. Rather than chasing payments through a maze, businesses/consumers will be able to connect with the payment issuers bank and confirm where the payment is.

Current State of Adoption

Banking and Finance Industries aiming to comply with PSD2 need to meet several deadlines, and some are nearly approaching. For Financial Institutions and merchants to be in complete accordance with the regulation, need to comply with SCA (Strong Customer Authentication) (7) by this September.

Several countries who are looking to remain compliant with the regulation, need to go extra lengths than others. That’s the reason why a lot of nations missed the PSD2 mid-march deadline, where the banks were asked to open their APIs for the TPPs (8)(third party payment systems).

Netherlands, Norway, and Finland are the most recent countries to implement the regulation. Customers in all three countries are used to friction-less and fast payments, and banks needed to create a balance between speed and security with the entry of new TPPs (8) in the scene.

GAFA, these tech giants have been intertwined with our lives so much that it seems only logical for them to make a play into banking. Facebook is offering P2P payments with Facebook Messenger, GooglePay is being used for payments, Apple is allowing money transfers with iMessage whereas Amazon has gone a step-up, and explored SME lending space. These innovative payment methods have raised the expectations bar of the customer. Moreover, these tech giants have joined the FinTech game with an inherent advantage- they’re closer to the consumer with application/services they offer.

With services like shopping, entertainment, and marketing, GAFA has not only been able to generate data about a customer, they have gained insights about his life in real time. These insights are helping these tech giants to create not only opportunities for cross-selling but also up-selling complementary products.

According to a report by Accenture, 80% of the banking revenues might extinct by 2020 because of different business models that are about to be introduced in the sphere. Services like consumer finance, cash management, current accounts, and even SME (small and medium enterprise) payments are ones that are going to come under the impact.

Future Growth Value Analysis (Source:Accenture)

PSD2 and Traveling Industry

As PSD2 goes into full effect, the European travel sector which is pegged at $318 billion is going to be transformed. As PSD2 mandates SCA (7), the travel industry and its members have to create a balance between the hefty authentication processes and seamless customer experience.

PSD2 opens up the data and payment information to the TPPs (8), who didn’t have the access earlier. This is going to have quite an effect on travel companies. Moreover, AISPs (1)and PISPs (5) are free to build new value-added services or trigger payments to customers. The highlight here is the ban on surcharge cost on consumer cards with PSD2. Booking companies are now offering customers to pay real-time through bank transfers.

Global airlines absorb $8 billion+ in costs for merchant fees and fraud. With real-time payments and enhanced transparency on costs, airlines will be able to decrease transaction fees. Moreover, the chances of fraud and foreign exchange price fluctuations can easily be avoided.

The regulation may have been initially designed for payment innovation, but it has also innovated the ways of customer verification. The merchants in the industry need to meet the SCA (7) requirements, which is one of the vital parts of the regulation.

On a broader scope, PSD2 in the travel industry ensures frictionless payments without compromising personal/sensitive information.

PSD2 and its Effects on Nordic Region

Banking and the financial sector in the Nordic region have kept abreast with technological advancement just like the other sectors in comparison to the different parts of the EU region. Sweden, Denmark, and Norway, between them there is a leading race to become the world’s 1st cashless society.

The cash payments in the region already account for 10% or less, which is one of the reasons open platforms like MobilPay has been able to flourish there. Impressively, some 42% of Nordic banks want to open fintech incubator hubs, compared to just 24% across the EU Region.

Besides experimenting with technology in hackathons and sandboxes as well as putting in money in accelerators and incubators, the Nordic region banks seem to be embracing the change. Norway’s DNB is said to be a prime example of Nordic region bank adopting the regulation.

The Nordic region is said to be the ideal place to lead the change. As Bo Olafsson, executive board director at Islandsbanki mentions, “being small scale enables us to move faster. Moreover, we have fewer resources means that we need to pick where we can lead more carefully.”

In all the positivity, we cannot deny that the region faces a little culture challenges too. Some of the banks are reluctant to change and slow to adapt to the new environment, and fintechs seemed to have just entered the scene for profitability and customer attention.

Talking about the future, the bankers also recognize that the current phase of adoption of new technology will lead to a period of take-overs (mergers). The start-ups fintech firms or even established ones are going to be bought or merged with big financial institutions in the next eighteen months.

America’s take on PSD2 and Open Banking

The consumers in the US have a long-standing love affair with their debit and credit cards. The payments in the country have been frictionless, and the fraud protection rate is high, especially in the case of credit cards. Currently the most digital payment options at this point in the country — even person-to-person — are fundamentally different form factors for credit card and checking account payments. What PSD2 brings, is an era of open banking, where the immediate payment mechanism will often bypass cards.

The Banks in America are viewing, the introduction of PSD2 in Europe as a trend which is going sweep the world. The first movers can get the advantage in this new era by keeping the customers at the center of innovation.

If we go into the depths, we realize that Open Banking is merely an ad hoc in the United States. A large number of data aggregators and fintech companies are already collecting customer’s account data online without the bank’s consent or involvement. Banks like Wells Fargo and JPMorgan Chase have already signed bilateral agreements with accounting service providers as well as data collectors. On the other hand, BBVA Compass, Capital One, Silicon Valley Bank, and Citi have incorporated open banking and are offering a chance to fintechs to build APIs.

What next?

The brick and mortar way of bank operations do need to change now with the advent of the fintech revolution. From delivering single or grouped products, the banks need to offer not only personalized but innovative services.

In the next couple of years, it is likely that we are going to see more and more banks across the globe collaborating with the Fintechs; the banks have the customer and the capital whereas the fintechs have the technology as well as innovative processes.

That’s how most of us must be thinking will happen in the times to come. But did we think that there is another ‘Game of Thrones’ in play here? Currently, we think that the customer data so far just remained with the banks, and fintech is in need of that data to build services.

However, with Artificial Intelligence and Machine Learning, the big tech companies have already been able to infer the customer’s data, as well as financial position without ever needing to see the bank transactions. As we all are aware, companies like Google, Facebook, Amazon have been analyzing not only a customer’s online searches but also their online/offline purchases.

In the times to come, we’ll get to know if PSD2 proves to benefit the customer-bank equation or fintechs take away the bread and butter of the banking industry.

PSD2 related acronyms