Oliver Lynch, Business Development Director, Comtrade Digital Services, explains how the new Payments Services Directive (PSD2) will bring exciting changes to the banking world – both for the customer and banking innovators.
1. What is it?
PSD2 is paving the way to the future of banking. In very simple terms, the directive aims to ensure every EU bank is digitally up-to-speed – making way for increased competition within the sector and improving the customer experience as a result.
2. Why is the EU introducing the new directive?
The directive aims to drive competition within the payment services market in Europe between banks and new payment service providers (PSPs). It also aims to drive innovation within the European Fintech industry and challenge the duopoly currently held by major credit card processing companies – in other words MasterCard and Visa.
3. The future of banking
Traditionally, the financial services sector has consisted of incumbent banks offering very similar, and basic, services. That is rapidly changing and today, thousands of fintech companies are challenging the status quo by offering a range of services that target the customer experience. They are making banking straight-forward and hassle-free.
Now, companies that previously weren’t associated with the financial services sector are playing a part. Take Viber, the instant messaging app, for example. Customers of participating banks can now transfer money via instant message using Viber. It’s that kind of simplicity and user-friendliness that we can now start to expect when we bank.
4. An end to hidden fees
As more players enter the market, the more likely we are to see a reduction in – or even elimination of – banking charges. Previously, banks could add transaction fees without any real competition to challenge them. With the market becoming more populated, banks will find their charges are being bypassed by customers using competitors’ services.
5. How will we get to that point?
Under PSD2, if requested by the account holder, banks must give third-party payment providers access to their systems and client current accounts. Those third parties can then offer payment services to their customers.
6. The API economy
What that will produce is an API economy, whereby third party applications (such as new payment providers or social media applications) can connect to core banking systems quickly. This ensures extremely fast time to market for innovative services that will set banks apart from competitors. Without an API policy, banks will lose out on opportunities to innovate and enhance their customer experience; a costly risk to take.
7. The risk for banks
PSD2 will increase competition within the banking sector significantly – a prospect that is worrying many of Europe’s banks. Some estimates show that even when they have complied fully, 20% to 25% of incumbent bank revenues could be at risk from the new competitors that PSD2 will facilitate.
8. Where will the competition come from?
It will come from specialist fintech companies like TransferMate and Pay with Fire. Large global brands like IKEA, Aer Lingus and Ryanair could also acquire a PSP license and process payments directly from customer current accounts.
9. Thriving in the post-PSD2 world
Large banks simply don’t have the resources to relentlessly develop new software and solutions and bring quickly them to market. Banks must therefore change how they view and define competition. Progressive banks will view the directive as a catalyst for them to embrace new business models – competing, but more importantly collaborating, with the new innovators in their field.
Every EU bank and financial services institution must show that they have complied with PSD2 by January 2018.