Banks and PSPs are rethinking strategies to defend against fraud and new competition.
The banking landscape has changed. Between 2014 and 2015, consumer log-ins to internet banking increased by 10%, while there was 6% decline in branch transactions. The revised Payment Services Directive (PSD2) is bringing about significant modifications to the payments landscape and it will affect all players and ultimately improve user experience without exception.
The new regulation issued by the European Commission has high expectations. It aims to put the customer and their security at the centre of the electronic payments process. However, many financial institutions will need to invest heavily in system and process upgrades to be able to adhere to this modernised approach.
In a 2015 press release, Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union, said: “European consumers want to know that their payments are safe when they shop or make a payment online. The new Payment Services Directive will ensure that electronic payments in Europe become more secure and more convenient for European shoppers. This legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow.”
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Legacy technology and practises mean that for many, a huge investment is required to make the necessary upgrades, risking existing revenue streams and brand reputation. In addition, traditional financial institutions are further exposed to the threat of the new competitors less hindered by existing technology.
For newer market entrants, with less cumbersome systems, PSD2 presents an opportunity to gain more ground on less nimble traditional players. For the larger financial institutions, turning to the fast moving technology vendor community for support, will enable them to react more quickly, bringing legacy systems up to speed.
Technology partnerships instantly can help close the generation gap for many financial institutions, with zero disruption to day-to-day activities. A smooth identity verification (ID&V) process is an essential part of successful customer interaction online and PSD2 recognises and promotes this. The ID&V process should take place in a manner that inspires trust with minimal consumer disruption.
As most ID&V processes rely on the compliance of the consumer it is vital not to overlook the importance of ease and familiarity in the process. New processes in response to PSD2 need to be future-proof and be combined easily with other authentication technologies like biometrics.
The directive aims to bring faster and easier transactions and increased security. It widens consumer choice and lowers transaction fees. In addition to encouraging slicker and more secure consumer experiences, PSD2 has another extremely worthy cause – opening up the complex European market.
PSD2 introduces Access-to-Accounts, which gives Third Party Providers (TPPs), direct access to consumers’ accounts. This also means that consumers’ card details don’t need to be shared online when making purchases.
Banks will have to give TPPs direct access to consumer accounts and need to get to grips with APIs. They will also need to ensure that they have the appropriate security measures in place to prevent fraud and also to respect consumer confidentiality. 88% of banks agree that security and data protection is a big concern with PSD2.
In a recent survey, 88% of banks see the challenge of overcoming their legacy systems, and the high cost of implementation as a barrier against their digitization. Banks also face a technological challenge, a question of performance. Only 14% of banks were confident that on ‘day one’ they would have APIs in place to support open access. But banks don’t need to tackle these challenges alone. For example, a customisable, modular client-hosted platform or SaaS solution, which allows consumers to verify themselves via recognisable and friendly interfaces, could be installed rapidly without the need to change these legacy systems by myPINpad.
As well as the technical challenge, there is also a challenge in thinking to be faced. PSD2 will put consumers back at the heart of personal banking, where they belong. The digital revolution has put power of choice in the hands of consumers. Banks will need to recognise this and react to it.
PSD2 intends to standardise security across a changing landscape, improve consumer security and incorporate emerging payment technologies into the existing standard. However, as a recent Finextra report highlights, this presents a major challenge for long standing banks and PSPs.
PSD2 should not be viewed as a hindrance or even a threat by banks. It should, instead, be viewed as a huge opportunity to rethink, reshape and renew.
It provides a foundation and framework for having a customer centric focus. In the immediate aftermath of the banking crises of the last decade, commentators, analysts and regulators all agreed that banks had to start putting customers first.
The extent to which this has happened is a debate that will no doubt continue to happen throughout the introductory years. But PSD2, if embraced, can show the roadmap towards this if banks are ready to follow some key advice:
- Strategise and introduce new services – Banks will have the opportunity to expand their services and become TPPs themselves. There is an opportunity for them to create new business.
- Put customers truly at the heart of the proposition. Challenger banks are producing customer-centric products and services and are winning business. So every step of the customer experience, from applying for new products and accounts to authenticating themselves to accessing their account must have customer needs and desires at their core.
- Increase consumer protection and take a collaborative approach – prepare IT departments and partner with knowledgeable solution providers that will strengthen security levels required and understand banks’ needs and legacy systems.
The future of banking is at a cross-roads and initiatives such as PSD2, and its focus on choice and a level playing field, gives the opportunity for banks to provide the next generation of banking for the millennial customer. Companies such as myPINpad are well placed to help banks rise to the challenge by providing innovative solutions rapidly and without the need to change current infrastructure.