Just how will PSD2 unleash an open banking revolution in Europe?

12 Jan 2018

Image: DD Images/Shutterstock

Banks’ monopoly over customer account information is about to cease – and it could be great news for consumers and entrepreneurs.

Tomorrow (13 January), the second Payment Services Directive (PSD2) becomes law across Europe, unleashing a new world of open banking.

This will completely overhaul banking as we know it.

‘We doubt that many third parties will be willing to connect to multiple banks as long as there is no common API standard across Europe’

According to research from PwC, nine out of 10 European banks intend to use PSD2 to change their strategy, and the majority of European banking executives say PSD2 will impact all of their core banking operations.

What is PSD2?

Under PSD2, banks in Europe will need to make customer data available in a secure manner, and eventually give third parties access to their customers’ accounts.

This new ecosystem will comprise not only financial institutions but also retailers; fintech players; firms in gaming, gambling and social media; and potentially any firm that involves financial information or transactions.

While it comes into force tomorrow, security measures will not become applicable until September 2019, resulting in a new payments ecosystem.

Just how will it affect banks?

Just how will PSD2 herald an open banking revolution in Europe?

Image: SB Photos/Shutterstock

Under PSD2, banks need not only offer services to be consumed by third parties, but will also need to think about how to use third-party services for their own offerings.

As part of recent PwC research – Waiting until the Eleventh Hour– to assess PSD2 readiness, PwC interviewed 39 senior bank executives in 18 European countries including Ireland, covering most of the world’s leading banks.

Nearly three-quarters (70pc) of the executives anticipate PSD2 will affect all of their bank operations.

As of 13 January, banks’ monopoly over customer account information and payment services will effectively cease.

Almost all banks (94pc) interviewed by PwC said they want to use PSD2 to change their strategic positioning.

“The new regulation will completely overhaul banking as we know it,” explained Sinead Ovenden, partner at PwC Ireland’s financial services group.

It will break down the banks’ monopoly over customer data. The big difference for consumers is that they are now in full control of the services they want to consume.

Application programming interfaces (APIs) will be the new channel for doing business. As banking services are unbundled, consumers, through the API ‘economy’, will determine where the demand will come from and reshape how society is going to work.

According to PwC, just half (50pc) of the European respondents have aspirations of their bank becoming a platform aggregator at some point in the future, while all Irish banks surveyed aim towards the platform model and full open banking, offering third parties the chance to build up new services using individual bank data.

Banks will face competition from third-party fintech players

Such a platform model would facilitate the business of other players by acting as an intermediary. It would mean banks developing an open platform that allows partners to integrate their products and services into the bank’s offering, while generating new products and services based on the bank’s API.

PSD2 API examples include checking available funds, account enquiries and credit transfers.

But, crucially, PSD2 is a boon for the fintech revolution. New service providers or account information service providers, similar to Mint in the US, could help users to manage multiple accounts in one place.

“For many banks, compliance with PDS2 has been a challenge. However, compliance is not their only concern. Banks need a proper strategic response to avoid becoming disintermediated by more customer-oriented third-party offerings. They will need to analyse the emerging payments landscape and identify new revenue opportunities for services – something most have yet to do,” said Ovenden.

Should banks feel threatened?

If they embrace the storm, they will do fine. If they hide from it, they will be devoured.

Banks that meet fintech players head-on with an open API platform will be in a position to focus on more value-add activities and let entrepreneurs pick up the slack in less-profitable activities.

“Any bank that could achieve this would be a powerful operator,” said David Stapleton, consulting director at PwC Ireland.

“However, the reality is that only a handful of large banks could reasonably expect to build a truly powerful partner ecosystem. In fact, we doubt that many third parties will be willing to connect to multiple banks as long as there is no common API standard across Europe. It’s clear that banks need to perform a rigorous self-assessment as they transition to the world of open banking, including their market positioning and competitive strengths.”

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years