As I have described in previous posts, PSD2 will force banks to open up their infrastructure to third parties by offering APIs under the XS2A (access to account) rule. The directive has the potential to fundamentally alter the payment landscape as we know it. One of the reasons why PSD2 will have such a large impact is that it will level the playing field and increase competition by integrating the role of new and emerging payment services into the regulation. While incumbents have the most to lose, there are also opportunities ahead for banks.
At the core of the directive lies the requirement for banks to offer APIs to third parties, and an API and platform strategy will be crucial in order to benefit in an open banking world. When BBVA hires a head of open APIs, it is not to comply with technical requirements. BBVA aims to create a digital ecosystem where third parties can connect to the bank’s core infrastructure and provide new services that strengthens customer experience and improves the bank’s own offerings.
In order to assess the opportunities and threats for banks under PSD2, it is useful to base the analysis on the roles introduced under the SX2A-rule (as it is important to talk about PSD2 without involving three letter abbreviations):
- PISP (payment initiation Service providers) will be able to initiate online payments from the payer’s bank account
- AISP (Account Information Service Providers) will be able to extract and accumulate customers account data, including transaction history and account balance
- ASPSP (Account Servicing Payment Service Providers) aka banks and financial institutions are the account providers that is required to offer APIs to PISPS and AISPs
The minimum effort required by banks is to comply as an ASPSP. This option requires the least effort, but increases the risk of banks becoming utilities, or “dumb pipes” as innovative competitors leverage the directive to take control over the customer interface. A compliance approach to PSD2 is an option, but will most likely lead to incumbents choosing this approach to become infrastructure providers of underlying banking infrastructure.
For banks looking for a more aggressive approach, there are opportunities.
Become a TPP by offering AISP services. This approach could strengthen incumbent banks value proposition as an everyday bank by collecting aggregating account data from other financial institutions as an AISP as well as other relevant open APIs. Since banks represent trust and security (at least in the Nordic region), banks has a unique position to become an identity broker and “financial life coach” centered around customers everyday finances. By taking this approach, banks should seek to become their customer’s favorite bank instead of the sole provider of financial services. This approach will create a strong position for banks in the overbanked population of the western world, and Swedish bank SEB as well as dutch ABN Amro has invested in fintech startup Tink to leverage this opportunity. Tink is one of many candidates that seek to become virtual banks, and incumbents should expect to see increased competition from fintech startups like Tink, Qapital and Moven as well as challenger banks like Lunar Way. This option enable banks to become one-stop shops for multi-banked customers with a consolidated account overview as well as a permission to initiate payments for both consumers, SMEs and corporate clients and should be considered as a primary approach by relationship banks such as savings banks and community banks.
Expand APIs to offer data beyond the requirements under XS2A. Banks hold vast amount of valuable data that may be leveraged in a data monetization strategy. While this is a seductive opportunity, it requires a well thought out information strategy, where only non-sensitive data is offered to third party. This approach enables incumbent banks to become part of external ecosystems in adjacent industries as well as providing value added services services to fintechs and other financial institutions.
Become a TPP by offering PISP services. This approach allows banks to expand their transaction banking offerings by actively disrupting the existing payment options for online payments as well as offering cost effective and faster API-based P2P payment solutions. This option could provide new revenue streams in a changing payment landscape but banks will need to compete directly with established players in the already crowded online payments landscape.
From an initial look at the consultation and discussion papers for the RTS (Regulatory Technical Standards) drafts published by EBA (European Banking Authority) there are still some questions regarding standardization, security, authentication and convenience that will shape the impact of PSD2. No matter the outcome of the RTS details, the directive represent significant changes to the payment landscape and the financial services industry as a whole.