04 July 2017
Will PSD2 bring the financial industry into a new era?
A lot has already been said and written about PSD2, Access to Accounts and the impact of this new regulation on the payments industry. Alessandro Baroni, CMO of equensWorldline, elaborates on this hot topic in an extensive Q&A session, giving his vision on some crucial aspects of PSD2. Finextra published a short video interview with him on the same subject, which you can also find below.
PSD2, Access to Accounts is said to be one of the most disruptive regulations in many years. Can you define what makes this regulation so disruptive?
Alessandro Baroni: “PSD2, and specifically the Access to Account (XS2A) stipulations are disruptive due to various reasons:
1. It effects the entire business model of a bank, challenging its revenues from a retail perspective on interchange fees, and from a corporate perspective on its merchant fees due to the fact that for Payment Initiation Services (PIS) no fees can be asked (as bank) and the PIS will cannibalize current online payment methods (not only cards but also online e-banking payments);
2. It allows non-banks to get in-between the bank and its customers. These so-called Third Party Providers (TPPs) can gain control of the customer pushing the bank to the back;
3. The control of aggregated customer information from multiple banks gets in the hands of TPPs, who can provide additional services based on this aggregated information.
This all makes it very clear that PSD2 is a basic precondition and a major step towards the concept of open banking.”
Which are the challenges the industry is facing?
“The main challenges for a bank are:
- To become compliant before January 2018 in a cost-efficient way (the latter is important as banks cannot charge compliancy costs to their customers);
- To compensate the loss of revenues because of decreasing merchant fees and interchange fees;
- To take action to retain direct contact with customers and prevent disintermediation with customers by new entrants;
- To manage increased risks related to the access of TPPs without the existence of a contractual relationship.
In addition, it is clear that regulation and the Regulatory Technical Standards of the European Banking Authority only provide the broad outlines and guidelines. This means it is left to the industry to fill in the details, under the restriction that for the basic service no fee can be asked and a contract between the bank and TPP is not required. So, the industry has to find out how to avoid fragmentation, how to manage the risks, and how to have a stable and secure infrastructure in order to make PSD2 work well.
Another big topic in PSD2 is the secure customer authentication stipulations, which requires a bank to have their digital bank channels secured by a two-factor authentication. Also this is again an investment required for a bank for which there are no new revenues.
It is obvious that not all banks will be able to manage all these different aspects themselves.”
Will PSD2 bring the financial industry into a new era or is it just a compliancy issue for each bank?
“XS2A should not be handled by any bank as just a compliancy issue. It really requires strategic thinking from especially the banks to decide what their position will be in the future: will they act as a utility provider of accounts, or as an everyday digital bank creating an optimal end-to-end user experience around the bank account (or something in-between)?
Currently Third Party Providers already make use of the banking infrastructure (e.g. Sofort, Yodlee etc.) whereby the bank no longer manages the client relation directly. The PSD2/XS2A regulation further increases the opportunity for non-banks to step into the space between the bank and the account holder (as a TPP) and to offer services based on the XS2A Payment Initiation or Account Information Services. In this respect you can think of parties who are already providing services directly to customers that are somewhat related to a payment or a need for bank account information, such as telco’s, online shops or financial software providers. For those parties working with APIs is easy and often they tend to have a shorter time to market as opposed to banks. Banks should definitely not underestimate this risk.
If banks want to retain – or even grow – revenues in the future they have to embrace the concept of open banking, introduce the new business model and take their role in the new eco-system.
What certainly should not be underestimated is the fact that banks are traditionally a trusted partner and for obvious reasons would like to remain in that position. Allowing third party access is great, but also brings along security issues that also need to be tackled.”
In principle the Payment initiation services (PIS) and Account information services (AIS) do not seem to be very new. I mean: there already are so many different payment means and also ways of retrieving account information. What is new about it? And will it replace the existing payment means?
“Here I am sure the market will do its work. Of course any online payment should challenge the existing payment types. So it is good to look at what PIS stands for:
- PIS is provided by a third party that is licensed, which should increase the trust to use it. And since non-banks can also provide it, multiple suppliers will compete to put such a service in the market which will optimize its convenience.
- PIS should be as easily accessible as online banking which makes it trustworthy, convenient and easy accessible when the bank provides the APIs for the retailers.
- In principle every bank within the EU should arrange for European coverage, so suddenly the retailer gets access to all bank accounts in Europe instead of having to rely on local payment means.
- As retailers have a better ability to arrange and control the payment method, they can also integrate it more easily with their loyalty programs.
Payment Initiation Services (PIS) is expected to have replaced 20% of online payments via debit cards or other online payment schemes within three years.
For Account Information Services (AIS) it differs per country, depending on what is already available. In general it’s a step forward that there now is one European way of e.g. account aggregation possible. Also, account information is easier to retrieve via the APIs which in the end also creates the possibility of having it combined with other data sources, resulting in better services towards the end customer.”
Can PSD2/XS2A also be seen as an opportunity for banks?
“PSD2 and Access to Accounts can definitely bring opportunities for banks. From a banks perspective, not just focusing on compliancy but also on the concept of open banking – meaning not just opening up for PIS and AIS but also for other services such as mortgages, loans, securities etcetera – can for instance lead to improved cash management solutions and better, tailor-made offers for loans which can be provided in minutes instead of days or weeks. Such new services can generate new revenue for banks and improve customer satisfaction.
Also the way in which these services are provided will differ from the past. There will be an open ecosystem where multiple parties are active, and where services will be built and provided based on the best components available.
So, if banks will be able to take their position in the new ecosystem and become part of the system, instead of just providing a service, they can surely reap the benefits of new opportunities that arise.”
Do you see differences within Europe how to handle and implement PSD2?
“Certainly. It is good to see how on one side there is European integration, but on the other hand each market has its own dynamics. Look for instance at the setting of a standard across Europe for the PIS and AIS APIs. The proposed standard to be used in the different markets and the way the market approaches the XS2A topic differs. You have:
- markets where there is a tendency to work together on the subject, which creates the possibilities of the appearance of so-called hubs, being a single entry for a specific market based on a single standard;
- markets where a current standard or channel is made compliant;
- markets where a standard that is created (Berlin Group, CAPS) will be adopted;
- markets where the individual banks will provide an access protocol themselves.
So, there is not one single approach. And you see that global banks are struggling with the fact that in all the markets they are present a different approach is used, which they all need to adopt.
All in all, we are just beginning to understand the impact of PSD2 and specifically XS2A on the financial industry. It definitely creates challenges now in terms of compliancy, but more importantly, it will determine the future of the banks role in the financial market as well.”
How is equensWorldline facilitating the industry to become compliant?
At equensWorldline we recognize that the PSD2 is a disruptive development which brings banks on the cross road of deciding to either step into the world of open banking, or remain in the background. Either way, equensWorldline can support the banks. Therefore, we are developing a unique and true end-to-end solution which goes beyond compliancy. We can support the bank from becoming compliant, to becoming a TPP up to being the everyday digital bank. We have decades of experience in running a solid and secure infrastructure with highly available, high capacity and low latency solutions. This makes us uniquely positioned to help banks and communities reap the most benefits out of PSD2 and specifically XS2A.”
Click here to read more about our solutions for PSD2 and XS2A on our website.