The financial services sector, led until recently by traditional banks, is undergoing a period of unprecedented change and disruption. Technology, as well as consumer demand for innovative services, are driving fintech startups, while regulators are proactively participating to create a level playing field. One such move is the introduction of the revised Payment Services Directive (PSD2), which came into effect in January 2018 and recognises new and emerging payment providers by creating a secure and competitive environment in which they can compete with the industry behemoths.
According to the 2018 World Payments Report, an executive survey by Capgemini and BNP Paribas, 21.4% of respondents indicated complete PSD2 compliance, while 18% are in an implementation stage. PSD2 has extended the scope of payment providers by enabling new companies to participate, improving transparency of payment fees and curbing transaction costs.
Changing the Rules of the Game for PSPs
The focus of PSD2 on open banking and application programming interfaces (APIs) is ultimately driving innovation for the benefit of consumers. It allows third-party providers (TPPs) – upon customer approval – to access their bank account data and offer value-added payment services, which in turn will accelerate industry disruption. New interaction models now meet customer demands for real-time, customised and seamless payment experiences.
PSD2 requires banks to open their payment infrastructure and customer data to TPPs, thus taking away their privilege over direct customer engagement. The subsequent shift in competition manifests itself with the growing presence of fintechs, technology firms, retailers and telecommunications providers in the payment ecosystem. Incumbents are evolving with new business models, innovations and collaborations to sustain relevance. For example, UniCredit (Italy) launched Buddybank, a mobile-only ‘conversational banking’ model, with claims that 75% of its customers are new to the group. UniCredit plans to use customer feedback and information to improve other parts of the business. Similarly, credit card companies Visa and Mastercard are actively seeking collaborations to develop new services and identify other revenue sources.
While new industry participants innovate based on their newfound access to customer data, consumers are increasingly using online and mobile banking and payments. The natural progression is visible with the adoption of advanced features such as personal finance management, instant and peer-to-peer (P2P) payments. Fire (Ireland) is a Payment Initiation Service Provider (PISP) that provides business and personal customers with digital accounts and debit cards and enables users to easily pay funds directly to another
Fire (Ireland) is a Payment Initiation Service Provider (PISP) that provides business and personal customers with digital accounts and debit cards and enables users to easily pay funds directly to another person or business in the Eurozone or UK without sharing any account or card details. For instance, utility billers can add a ‘pay from your account’ link to emails, enabling people to click and pay from their accounts without using a card.
A Radically Different Payments Industry
PSD2 goes beyond enabling Access to Account (XS2A) for third-party payment providers; the guidelines focus on many other aspects to ensure customer protection. Some of the other influences are:
- Catalyst to change – PSD2 encourages open banking, which in turn impacts business models and service innovation. Customer experience can be enhanced across the payment value chain with multiple payment initiation options, apps to integrate and monitor financial information, geo-location-based coupons, instant and P2P payments. Ulster Bank announced Ireland’s first banking open API for seamless and secure linking of customer accounts to TPPs.
- Impact across stakeholders – Lower entry barriers enable PISPs, PSPs and account information service providers (AISPs) to enhance their services based on their ability to harness customer data and integrate it into other networks and apps. The impact of Google and Amazon will be compounded with innovation and demand evolution. According to the 2018 World Payments Report, e-wallets and payment apps offered by large tech firms contributed 71% of non-cash transactions globally during 2016.
- Pace of innovation – Beyond viewing PSD2 as a compliance requirement, or adopting a ‘wait and watch’ approach, many companies identify it as a stimulator for competition. Investments in start-ups focus on collaboration and phenomenal growth of some of the start-ups in the payments industry are a testimony to the immense potential. Stripe, a San Francisco-based digital payments platform, plans to capitalise on open banking by offering its infrastructure to any new or emerging fintechs looking to enter the sector without the hassle of being regulated.
APIs are effective, standardised and easy-to-use interfaces. TPPs offer their core capabilities via APIs and benefit from access to data to further improve solutions. Companies that integrate APIs benefit from easy implementation, testing and lower innovation cost. N26 (Germany) is a mobile-only, pan-European bank that provides consumers with a single digital platform for all banking needs. It integrates APIs from many partners and customers can access new services without any fees. APIs help to scale and add value as well as fit well in companies’ compliance and strategic plans.
With game-changing technologies and business models, the linear model of the payments industry that customers and banks once operated in has ceased to exist. Today, the industry is a complex web with multiple industry participants, many associated and complementary services, and a focus on creating a seamless and personalised payments experience for the user.