A fresh perspective on PSD2

Shifting Banking Focus From ‘Protection’ To ‘Possibility’

In 2018, PSD2 effectively lit a touch paper to wholescale Banking transformation. It may be a slow burn but, according to Oliver Dlugosch, CEO of ndgit, it’s already generated far-reaching changes to investment attitude and strategy.

According to Gartner, 50% of G20 countries will adopt a form of Open Banking regime in the next year. As PSD2 pushes this to a tipping point, Banks are increasingly looking to adopt a more opportunistic mindset and are prioritising API initiatives to reduce costs and improve customer satisfaction and success.

In the next two to three years, we will see Banks’ PSD2 efforts move beyond compliance and market-protectionism to more agile and flexible approaches that allow them not just to seize existing opportunities but to create them.

However, there’s still much work to be done. A quarter of institutions currently feel ready and confident about their strategic plans. For many, PSD2 is still regarded as a mid to long-term trend, with investment allocated in response to requirements rather than to get ahead of the curve.

ndgit believes this will change, as national regulators complete third-party licensing processes and API standards fall into place. Banks are already looking at what is truly possible by embracing open banking, shifting experiences from transactional to inspirational and securing their place as digital entrepreneurs of the future.

Choosing a pathway determined by PSD2

So why the delay and what’s holding them back? PSD2 is daunting for Banks because it represents a seismic shift, both strategically and operationally, to their traditionally slow-to-change, risk-averse businesses.

PSD2’s primary goal is to deliver a cashless society by removing friction and driving competition and choice in the e-transaction space. It achieves this by allowing regulated third-party providers (TPP) to manage accounts and initiate payments on consumers’ behalf. This, in turn, challenges Banks to deliver more innovative services. PSD2 also paves the way for peer-to-peer transactions, enabling commercial organisations to accept payments and deliver financial services direct to consumers, without incurring card fees and charges.

All of this is reliant on Banks opening up their payments infrastructure and customer data to authorised third parties. Many are reluctant to do this, fearing it will allow the likes of Google, Apple and Facebook (GAFA), to commandeer their data assets and use them to roll out their own account-based payment solutions direct to mass audiences across the continent.

This has resulted in two banking mindsets. Those who are satisfied to become ‘behind the scenes’ facilitators, leaving the customer relationship to others. And those that want to use all of the new Open Banking and API tools available drive enhanced, customer-focused offerings that complement their existing Banking services, creating new revenue streams that fund further innovation and commercial growth. This includes becoming TPPs themselves, in order to safeguard their customer base and repositioning themselves are relevant to the digital consumer.

Joining the open revolution

When it comes to facilitating trusted transaction services in highly regulated environments, Banks have a head start on new TTPs who have lots of challenges to overcome before they can achieve viable services or drive a critical mass of consumers.

A report by Deloitte indicates that about half of participating Banks are planning to become a Payment Initiation Service Provider (PISP) or an Account Information Service Provider (AISP). Moreover, around half intend to launch new products and services, with about a third planning to offer ‘premium’ APIs or additional non-payment services through APIs. In addition, more than 30% are interested, in partnering with FinTechs or other players.

By empowering and enabling these new open commerce ecosystems, Banks can not only provide payment initiation services but also access and exploit the tremendous amount of data inherent in the transactions to deliver more personalised services and user case applications.

APIs key to connecting ecosystem

Before they can implement new digital banking strategies, Banks will have to invest in microservice layers to orchestrate new digital channels, integrate with modern interface requirements and deliver security across a more connected ecosystem.

At ndgit, we are already working with European Banks and third parties to launch financial services that empower their customers. They are using our technology to integrate customer-case financial applications via APIs into banking portals, giving in-house IT teams and commercial customers the freedom to design customer interfaces and services, while the Bank takes care of product handling in the background.

From our experience, it’s clear that Banks are looking for mature, well-proven, pre-built API platforms that deliver secure connection of AISPs and PISP partners and third-party consultants as well as automated reporting to help them smooth the way and manage resources and future service delivery more effectively. For them, it’s important that software not only accommodates PSD2 implementation to local standards but also simplifies and accelerates their go to market strategies.

Key trends for 2019 and beyond

At this stage, no one knows for sure exactly what the future post-PSD2 ecosystem will look like. It’s unclear who will emerge as the victors and which killer apps will capture the consumer’s hearts and minds. Faced with so much uncertainty, Banks will have to keep their options open, be flexible and ready to respond to opportunities as well as threats. NDGT believe that the following key trends will drive 2019 investment:

• Closing the customer expectation gap.
  Banks will have to become more proactive in how they engage with customers to deliver the new personalised services that will allow them to compete in the new ecosystem. Services will need to be frictionless and user-friendly as well as secure and competitive.
• Preparing for disruption
  Banks will experience a threat from new entrants and consumer technology brands. They will have to reinvent themselves as ‘digital’ players and that means being able to go to market fast, scale up quickly and be more responsive to market demands. While innovation cannot be rushed, there is pressure to innovate quickly to secure early market share ahead of the competition.
• Establishing new partnerships and alliances
  There’s already been an increase in collaboration within the banking ecosystem, particularly between FinTechs and Banks. We’ll also start to see more aggressive co-opetition strategies, where unlikely competitors will form partnerships based on synergistic strengths, to retain control of their market and to keep newer players in check. It will also mean more B2B models of engagement with non-banking partners to keep their technology fresh and give them a competitive edge.
• Building customer loyalty
  PSD2 will drive more choice, and service options, encouraging consumers to shift their financial providers more frequently and escalating customer churn. Consequently, service development will be driven as much by customer retention and loyalty as customer-acquisition. Keeping offerings fresh and being able to deliver value adds will be crucial to prevent switching for both consumer and commercial accounts.
• Navigating new ecosystems and opportunities
  Undoubtedly, PSD2 will require banks to rethink their retail Banking customer relationship and revenue/business models. It will also mean investing in open technology and providing access to APIs. But it’s also about the whole future of retail banking. There are huge advantages to be had if Banks are prepared to take them.
• Establishment of ‘Banking-as-a-Service’
  The final stage in the evolution of PSD2 may well be the establishment of Banking as a Service. Where digital companies access accounts data and clients benefit from the growing digital ecosystem of innovative FinTech features, SaaS provisioning and easy-to-connect banking and products. Banks will look for flexibility, neutrality and straightforward integration as well as the ability to accommodate cross-industry standards to allow services to be easily transported across countries and channels.

Oliver Dlugosch, CEO from ndgit GmbH

Topics

Share this article