Open Banking and PSD2 – who are the winners and losers of the new age?

You could quite easily name 2018 as the year that changed personal data in Europe.

May 2018 saw the implementation of the new and infamous GDPR regulations, and the flurry of emails that followed. January saw the introduction of the EU’s Second Payment Services Directive (PSD2), which exposed banks to a new surge of competition from third party fintech players, requiring them to open up their transaction data via APIs to other Payment Service Providers (PSPs).

So, what are the long-standing implications of this shake-up for the financial services industry? And how will consumers be affected day-to-day?

Like its predecessor, the Payment Services Directive (PSD), which was adopted in 2007, the PSD2 aims to implement regulation which will ultimately lead to increased competition in the sector, prohibited surcharging and increased security of payment services. So-called Third-Party Payment Services Providers (TPPs) offer payment services and solutions to customers. They form part of a new category of PSPs, which can be divided up into Payment Initiation Service Providers (PISPs), and Account Information Service Providers (AISPs). The latter being those who offer services that help consumers analyse their spending patterns, expenses and financial needs online, with in-built analytics to make the whole process user-friendly and intuitive.

For banks, the increased competition of existing service providers and new market entrants is the obvious impact, however fees also will be affected overall. The Interchange Fee Regulation has already reduced the fees generated by banks and card networks from card-based transactions. However, as the PSD2 allows other service providers to initiate payments, the interchange fees, network fees and acquirer fees previously received by the bank, card network and acquirer bank will effectively be retained by the merchant. This could affect millions of transactions daily and therefore cause an exponential impact on the revenues of retail banks and card networks. Equally, this offers significant revenue opportunities for technology giants and online businesses wishing to authorise the transactions themselves as a PISP yet scooping up the additional benefits from the lack of interchange fees, reduced liquidity risks and potentially faster clearing funds. Given the industry shake-up, retail banks will evidently need to collaborate, rather than compete with the fintech industry in this new environment.

For consumers, the power has shifted in our favour somewhat. Consumer engagement and experience from incumbent retail banks will become more pivotal than ever in retaining loyalty and cross-selling products and services. Moreover, although banks currently form our main interface for checking balances, transferring funds and paying bills, new offerings of payment initiation services by third-party providers could alter banks’ position in the ecosystem, meaning that new players take on that day-to-day service role, and exposure to the consumer, leaving banks in the background providing a simple utility service.

But as is typical with consumers, much of the battle lies in awareness around regulatory changes, and therefore the security of changing their modus operandi regarding personal finances.

But as is typical with consumers, much of the battle lies in awareness around regulatory changes, and therefore the security of changing their modus operandi regarding personal finances.

A poll of over 2,000 British consumers conducted by YouGov revealed that 90% had not heard of the Open Banking initiative, with 45% saying that they are not likely to use it when it becomes available. When the respondents were asked about sharing personal data through Open Banking, 60% would not consent to this, with concerns including security and that third parties would be able to contact them. Additionally, in an Accenture study conducted before the changes[1], even though half of consumers surveyed said they were comfortable with the new payment initiation provider concept, it was clear that their trust lay in known payment providers, with 76% ranking traditional banks as their first preference, and online retailers ranking in second place at 40%. Surprisingly, challenger banks did not rank as consumers’ first or second preference as a PISP, proving that new players still have significant traction to gain in consumer trust before leading in this area.

[List of potential PISPs/AISPs given to respondents by Accenture]

[1] Accenture Payments, Consumers’ initial reactions to the new services enabled by PSD2

#openbanking #apis #fintech #financialservices #onlinebanking #telco #digital #transactions #smartphones #banks #bigdata #PSD2 #banking #payments #GeneralDataProtectionRegulation #regulation #customerexperience

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