PSD2’s Open Banking. Who will be the winners and losers?
In any sector, regulators are viewed as the watchdogs of their respective industry. Recent regulations in the financial industry were aimed to favour consumers’ interests often to the disadvantage of businesses.
Through the implementation of PSD2, the EU has made a commitment to creating a more competitive market in the payment services industry by promoting technology, enhancing security and reducing barriers for new entrants. PSD2 is the EU’s Second Payment Services Directive, approved by the European Commission and applicable as of January 13th, 2018.
PSD2 is a 3D regulation with the aim of benefiting consumers, financial institutions and businesses simultaneously. The benefits of this regulation are seen as a vast overhaul and improvement on the previous regulations, largely due to the following rules:
- It addresses stronger customer security procedures by ring-fencing sensitive data from any external threat. With €1.44 billion of fraudulent card transactions in all countries of the Single Euro Payments Area only in 2013 (as revealed by Europol) the emphasis on data protection procedures was vital. In fact, Regulatory Technical Standards (RTS) is the only article of PSD2 to be published separately with extensive details.
- Upon customers’ consent, banks will be obliged to open their systems and share customers’ data to third-party providers (TPPs) via APIs, creating new opportunities for fintechs in the payments services market. Moreover, competition between fintechs will offer consumers value for money for the services provided. In the meantime, fintechs and established banks will be imposed to “up their game” by providing more customised services to increase consumers’ loyalty. Businesses could partner with fintechs and banks to get embedded in their mobile-apps offering non-financial services.
- Merchants will no longer be allowed to levy surcharges on the how-to-pay methods allowing consumers to use any type of card with no extra cost. Customer liability for unauthorised payments will be capped at €50 (instead of €150). In addition, the maximum time for processing customer complaints has been cut from 8 weeks to 15 business days.
- Third parties operating in the ATM business must disclose any withdrawal charges both before and after transactions, which will directly benefit consumers and indirectly financial institutions, by reducing the number of complaints from their own consumers related to hidden fees applied in the cash withdrawal operations.
The above-mentioned benefits are directed to consumers, financial institutions, businesses or all of them combined. However, there will be further benefits such as a socially inclusive financial system providing personal financial support services to those who have never had access to such services:
- Opening the market will give the green light to innovative start-ups that are aimed at offering full-package services such as; building a credit history, managing personal finances and importantly having an easy access to the long-term financial products as pension funds or home mortgages.
- PSD2 has also regulated how Personal Financial Management (PFM) solutions will be operating in the European market. Consequently, it will lead even more start- ups to create these one-stop platforms where all current accounts, credit cards and other financial products can be aggregated in just one display. Therefore, consumers will have a full picture on “who charges what” giving them the power to drop pricey products and replace them with more competitive alternatives.
While, most of banking products have their returns linked with risks, the payments segment is considered as one of the most profitable with a very low risk. This explains why the payment segment is very appealing to old players and new entrants alike.
In a report published in February of this year, Accenture estimated that by 2020 the total banking revenue pool in Europe associated with Open Banking-enabled activities will be €61 billion (approx. 7% of the industry revenues). PSD2 is considered to be one of the toughest shake-ups to happen to the banking sector in decades, and there is a potential market share at risk for banks if they won’t embrace the new changes. Most media outlets suggest that banks’ positions are at risk and opportunities only exists for fintechs. But things can go differently, and the industry can have a win-win-win situation for all players without any loss but indeed even maximising profits.
However, there is one unique competitive advantage in start-ups’ favour, which is their speed of adaption and iteration. Most established banks have a complex communication structure. Therefore, time-sensitive decisions might take longer due to the length of passages across different management levels. Conversely, start-ups can take and execute decisions much faster, usually having to pass decisions through fewer than 3 levels to achieve top management approval. Players that benefit from an efficient decision-making process can really gain a significant market share in this relatively low risk segment.
Will be those who are embracing the changes, leveraging economies of scale and offering competitive pricing structures. They will put customer experience as their first priority. One of their top strategies will be creating a 100% digital journey for their existing customer base and newly acquired customers. They will be actively partnering with third-party providers to offer new-added values services (financial & non-financial), maximising new revenues streams. Gainers will find themselves steps ahead in comparison to passive players by empowering technology such as monetising big data and developing advanced analytics.
Will be those who are considering PDS2 as an extra cost for IT systems and compliance. Their top priority will be just to allocate sufficient budget in order to comply with the new rules. The regulation offers fewer barriers for new entrants, therefore, time-to-market will be reduced to the minimum and a significant market share will be lost to faster actors. Wait-and-see adaptors are considered passive players as they won’t anticipate where the market will lead them and might find themselves steps behind in this new competitive environment.
If PSD2 will test any different grounds in the market, it is definitely going to test innovation and technology. An ideal vision of the market is one in which current players innovate in their business model and invest in new tech.
On the other hand, corporations will face further challenges within their organisations, across many areas starting from; IT systems, products development, marketing strategies, legal procedures and obviously finance departments. The ideal vision within corporations will resemble an autonomous beehive, with total alignment on the objectives between departments. Therefore, all players must react quickly and adequately to keep the business as usual without any disruption and get the most of PSD2. When it comes to Open Banking, speed is everything.