PSD2 is reshaping the entire financial ecosystem all the way from traditional financial players to third-party providers (TPPs). The regulations will make it easier for technology companies, FinTechs and challenger banks to increase market share in a space that has been long dominated by banks. The resulting improved competition in the financial market, ultimately means more innovative solutions for both B2B and B2C customers.
Photo Credit: Samuel Zeller
An increasing number of people are using social media and mobile apps to fulfil their banking needs such as online payments, P2P transfers or for managing their daily transactions. The considerable growth in popularity of companies such as iZettle, Monzo, and Instantor in recent years is evidence of the potential in this area for companies that meet consumer demand for convenience.
Banks Will no Longer be the Sole Owner of Customer Data
TPPs will enter the market as either payment initiation service providers (PISPs) or as account information service providers (AISPs). Revised directives have mandated the banks in Europe to make their customer’s data accessible to third party service providers in a secure via APIs. Those third parties will use the data provided by the banks to develop new services and to improve existing services.
The evolution of PSD2 will fire up the competition between banks and will require banks to compete with FinTechs and other players offering financial services. PSD2 heralds the advent of Open Banking and only banks willing to evolve will be able to thrive in the coming “digitalverse.”
Why do we Need PSD2?
The financial crisis in 2008 resulted in the implementation of stricter regulations being imposed on the financial sector and billions of euros in fines being imposed on them by banking regulators. This led the banks to focus more on shoring up their balance sheets and avoid overt risks which could antagonise regulators. This mass evacuation by the financial sector, particularly in the consumer and SME space was the seed of growth for the FinTech scene.
As incumbent banks lose ground to FinTechs, a paradox is created, that will only be exacerbated by PSD2. FinTechs provide more convenient and user-friendly experiences than banks, especially for the millennial generation, which makes it difficult to keep up, let alone compete. This already volatile environment is exacerbated by plummeting trust in banks and rocketing trust in technology. It isn’t all bad news though, banks are largely trusted to keep consumers’ money safe, and the gap isn’t that large.
PSD2 will also create substantial challenges for the banking industry. It imposes massive IT adoption cost on them and forces banks to share with their competitors their most important commodity: their data.
The Effect of Non-Compliance on Revenue
PSD2 is creating a framework of transparency and openness in the financial industry. Its aims to create a neutral platform for innovators and simultaneously increase data security for consumers.
Continued adherence to traditional practices and an inability to update services to stay competitive will have a direct impact on the bottom line as customers begin to shift to TPPs for better solutions. The impracticalities in the traditional financial service sector are falling out of favour as technology responds to the consumer demand for speed and convenience.
Moreover, it is not just the millennial generation that is increasingly choosing digital alternatives over visiting a branch for banking services. Consumers across generations are picking convenience, speed, and user-friendliness over a range of other factors to facilitate their needs better. Even for banks that can update services to meet consumer demands, it is estimated that 9% of revenue will be lost to PISPs by 2020.
Photo credit: Hanson Lu
First Mover Advantage:
Incumbent banks rely on trust, safety and brand recognition to maintain a competitive edge. However, TPPs, FinTechs and Challenger banks should not be underestimated as they enter the market. Early adoption is critical to win consumer trust and to demonstrate to consumers an evolution in the type of services provided.
When online banking was first introduced some incumbent banks were able to effectively out-compete new players, and PSD2 should be no different if banks can either effectively collaborate with FinTechs.
For incumbent banks to take full advantage of the regulatory changes, they need to introduce new digital products and focus squarely on enhancing the customer experience. This will help improve customer retention and broaden revenue streams as new customers are attracted.
Banks can monetise these opportunities effectively through the collaboration and partnership with FinTech companies. The collaboration will enable banks to provide AISPs and to offer more advanced services, which in turn will build customer loyalty.
With the era of Big Data upon us, banks have a credible head start against newer FinTechs as they have decades of data on consumers and a long history of industry experience. Even with Artificial Intelligence systems and the implementation of GDPR and PSD2, FinTechs will still take years to reach a databases size anywhere near mainstream more established banks.
Simultaneously, while incumbent banks are still struggling to know what to do with all this data to maximise its value, FinTech companies have developed some advanced systems to gain insight from data. FinTechs are unable to offer the full range of services currently being provided by banks.
The collaboration and partnerships between FinTechs and banks are beneficial to both and could provide a competitive edge. The PSD2 is an opportunity in hiding and, banks need to be smart to capitalise and remain relevant in the coming decade.