How Europe's PSD2 Regulation Could Spark a Banking Revolution

How Europe's PSD2 Regulation Could Spark a Banking Revolution

How Europe's PSD2 Regulation Could Spark a Banking Revolution

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Killian Clifford

Killian Clifford is Principal Consultant at Digital Baobab, a niche consultancy operating at the intersection of payments, banking, technology and digital. Killian has 20 years of experience operating in these industries.

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The Payment Services Directive, Part 2 (PSD2) came into force across the European Union (EU) in January 2016, giving member states two years to implement it. It is likely to revolutionise how financial services are delivered across Europe, initiating a wave of innovation from fintech startups. At the same time, it threatens to disrupt existing business lines for incumbent banks.

At its core, PSD2 puts the consumer at the heart of account and data ownership, removing that privilege – and the subsequent revenue streams – from banks. The directive will force financial services providers across the EU to provide access to their customers' payment accounts, for informational and payment purposes, for free to any licensed entity. Only the permission of the account holder will be required. The risk of disintermediation of banks from their customers is real, and this is exercising the minds of both compliance and strategy departments across the industry.

Confusion abounds

Yet there is still much uncertainty surrounding PSD2. This is not surprising, for much of the details remain to be defined. This job has largely been left to the European Banking Authority (EBA), which has been mandated to define the necessary guidelines. The most contentious is the standard for strong customer authentication and secure communication – which is subject to its own separate timelines and may not be finalised until 2019, some 12 months after the rest of PSD2 becomes law.

Furthermore, there is also confusion as to who will define the application programming interfaces (APIs) that will underpin PSD2. Should this be the responsibility of the EBA? The initial noises coming from them indicate they wish to let the industry agree upon the API standards first before they rubber stamp them. The EBA feels that by being too prescriptive and defining the APIs themselves, they threaten to undermine the cooperation and innovation that they are keen to foster throughout the industry. For a solution, we may need to look to national initiatives, such as the UK's Open Banking Working Group (OBWG) to initially define them before being recommended by the EBA.

Opportunities ahead

Despite the uncertainty, banks can at least view PSD2 as one directive that presents new opportunities and business models for them to employ. The risk is, however, that by focusing solely on the more immediate API compliance projects, banks remain oblivious to the threat from up-and-coming fintech players.

By embracing a 'bank-as-a-platform' model and allowing access through open APIs, banks can still put themselves at the centre of the API economy. In setting out on the path to become more like fintechs, banks have three choices. For those business lines where revenues might be disrupted, they can build, partner or buy. This is the age-old conundrum that has vexed software-acquiring CIOs over the years, and it is especially relevant for today’s open-API business models.

More forward-thinking banks are already treating this as the starting gun in the race to a new open banking ecosystem. For them, moving to an open banking API economy represents an opportunity to gain a strategic and competitive advantage over those banks that are just happy to conform to the directive. Those at the digital vanguard have already started devising their API strategies. Some have even created new open API divisions.

Banks as fintechs

However, juggling regulatory compliance and strategic ambition can be tricky. To take advantage of these new business models, banks will require a sea change in how technical and product innovation is performed. To innovate at the speed of a nimble startup, banks need to mimic their product development practices. They need to replace waterfall with agile, their business analysts with product managers, build MVPs in order to learn by failing fast, and to embrace disciplines like product marketing. In short, they need to think and act like fintech startups.

For some large organisations, innovating like a lean startup is seen as next to impossible to achieve internally. The overhead of legacy banking systems and a risk-averse corporate culture hinders any attempt to innovate either quickly or at low cost. Fostering this culture and setting up innovation teams should not be fully dependent on completing PSD2 compliance projects. Yes, there will be some dependency, but the two need to be developed simultaneously. And getting both right will be critical for the survival of those banks participating in the new open-API economy, which in Europe will soon be all banks.

Those organisations that embark on their API journeys today and aim to foster a fintech product development culture will be those who profit most from the forthcoming changes contained in PSD2.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Killian Clifford

Killian Clifford is Principal Consultant at Digital Baobab, a niche consultancy operating at the intersection of payments, banking, technology and digital. Killian has 20 years of experience operating in these industries. Currently he is focused on the strategic opportunities offered by regulatory change, such as PSD2, open-API banking and enabling large organisations to innovate like fintechs.

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