How PSD2 Will Revolutionize the Banking Industry
The Revised Payment Services Directive (PSD2) is a piece of European legislation enacted in January 2016 and that all member states must implement by January 2018. It aims to increase competition and provide customers with new types of payment services and enhanced protection and security.
The practical effect of PSD2 for banking customers
PSD2 allows bank customers, whether they are businesses or consumers, to use third-party providers to manage their finances. By January 2018, European banks must provide access to customer information (e.g. account balances and details) to AISPs (Account Information Service Providers), introducing another entity to the customer relationship. In addition, banks must expose customer information and payments services to Payment Service Providers (PSPs), dis-intermediating the traditional payments model. Most importantly, banks and financial services institutions may also take on the role of AISPs and PSPs themselves. Thanks to PDS2, in the near future, you might use Facebook, Apple, or perhaps a fintech startup to pay your bills, analyze your spending and create a budget, or transfer money, while still having your money in your current bank account. PSD2 obligates banks to give these third-party providers access to their customers’ accounts through open APIs (application program interface), allowing third parties to build financial services on top of banks’ data and infrastructure.
What PSD2 means for banks
Obviously, PSD2 will create a great deal more competition for basic banking services. PSD2 provides a legislative mandate for more open data and an increased open data interchange between financial services organizations, and a way for third-party providers to both intermediate and dis-intermediate the relationship between the customer and financial services institution. Because banks and financial institutions are taking on the role of AISPs and PSPs themselves, it will require them to think about engaging and innovative ways to compete in the newly open and ultra-competitive financial services marketplace. For banks, this competition will be aided by the effective use of APIs.
PSD2, open banking, and banking-as-a-platform
What PSD2 will lead to is a fuller embrace of the concept of open banking, which uses open APIs to allow developers to build applications and services around the financial services industry, with concomitant increases in financial transparency on the part of institutions. Traditional banks know that to compete in this new marketplace created by PSD2, they are going to have to develop these digital capabilities to avoid being shut out completely by new entrants, whether in the financial services industry or elsewhere, with superior, more agile offerings. What will eventually happen is that basic financial services like transferring money or online bill pay will become commoditized transactions - a “banking-as-a-platform” service, if you will, which can be offered by numerous providers in a fiercely competitive marketplace. But banks have an advantage of being a trusted “financial advisor” brand. By being the best at helping their customers to manage their financial affairs, make better decisions, and save money, banks can drive deeper trusted advisor relationships which will increase customer lifetime value through upsell and cross sell opportunities, as well as create a more long-lasting relationship. Banks can take advantage of becoming PSPs, and use this opportunity to transform from a place where mere financial transactions happen to a more engaged, personal, and therefore more profitable relationship.
PSD2 places more importance on APIs
In order to create those personalized relationships, banks are going to need to learn lessons from other industries about multichannel customer engagement, personalized offerings, and seamless customer experiences from brick-and-mortar branches to online to personal devices. All of those, in order to work and work well, require deep integration hooks into an organization’s systems, and the best way to connect those systems together and make the data available for consumption in a manageable and governable way is through the APIs. A holistic approach to API strategy for banks and other financial services institutions can go a long way to pave the roads for the transition that they will have to go to thanks to the requirements of PSD2.
For more information about how PSD2 is transforming banking, and how one bank is using API strategy to meet those challenges head-on, take a look at our whitepaper: Open Banking and the Future of Financial Services.