The Revised Directive on Payment Services (PSD2) aims to transform the way banks interact with customers, merchants, payment processors, and other financial service providers. Under PSD2, third-party providers can build services that allow customers to make financial transactions using their bank's financial information, essentially bypassing the need for banks to provide their own services. Instead of being the sole provider of financial services for their customers, banks are relegated to account holders.
Today, banks are the sole managers of their customers' financial data. If customers wish to withdraw, deposit, or transfer money, they must go through their bank to do so. Many banks provide online banking and other services by partnering with third-party software providers or by building their own online banking platform. These services are still strictly controlled by the bank. With PSD2, these services will be challenged by an open ecosystem of third-party services, leaving banks in a precarious position, by essentially replacing their monopoly with a new industry of financial services.
From Sole Service Provider to One of Many
PSD2 challenges the level of control banks currently hold over their customers' financial data, by enabling open APIs to require banks to grant authorized third parties access to customer financial data. These third parties can be payment processors, merchants, or FinTech companies providing services that directly compete with services currently offered by the bank. In effect, this turns the banks into vaults for customer data, rather than the end-to-end service providers that they were traditionally.
This presents a real challenge to banks that differentiate themselves based on the services they offer. Banks can relatively easily provide financial analytics, investing and budgeting tools and mobile banking apps, as they have direct access to customer financial information. They have insight into how customers are spending their money, where they spend it, and who the recipient of each transaction is. Banks use this data to better understand customer spending patterns, helping them track expenses and even scan for fraud. All this is possible because banks have complete visibility into transactions.
As PSD2 comes into effect, this insight around transactions is lost if a customer uses a third-party service instead of the bank. The bank will only have visibility into the transactions between the bank and the third-party provider. Instead of knowing how a customer spends or receives money, banks will only see the payment service providers that the customer interacts with. This shifts the ability to deliver advanced analytics from banks to third parties, making these companies the new aggregators of financial information.
For banks to stay competitive, they need to be innovative with the services they offer. Third-party providers will challenge banks' services by introducing new services, new features, and new technologies. This was recently explained by Chris Skinner, Chair of the European networking forum The Financial Services Club: "As customers find enrichment of their transactions and lifestyles from new banks...you use them more and more. Soon, all your lifestyle transactions are with an intelligent new bank and all the old bank sees is regular payments to your new financial relationship." With payment service providers leveraging customer data in new ways, traditional banks will quickly find themselves left behind.
The Need for Innovation
The wave of financial services providers that emerged following PSD2 poses a significant threat to banks. Account-to-account (A2A) services alone could potentially cost banks €50–€100 million in lost revenue. PSD2 is meant to give customers greater choice over how they manage their finances, but in doing so, it puts pressure on banks to improve their services. FinTech companies are already using advanced technologies to provide stronger security, more user-friendly interfaces, and comprehensive online banking solutions. With more users moving to mobile and online banking, the use of new technologies will become even more critical to the banks' strategy and business.
To remain relevant in the PSD2 era, banks will have to look at the new regulations as an opportunity rather than a challenge. Innovative players in the banking sector and the FinTech industry will rush to bring new technologies and services to market, leaving established and slow-moving organizations behind.