Tony Virdi, VP of Banking and Financial Services in the UK & Ireland at Cognizant
As regulators become increasingly concerned with consumer protection, new frameworks such as The Payments Services Directive 2 (PSD2) are forcing the existing payments players to re-think how they operate in a market that is opening up rapidly to new forms of competition. With the emergence of new digital payment methods, such as Apple Pay, combined with the growing number of Fintech-led account aggregator businesses, this regulation which is in the final negotiation stages is going to cause disruption and pave the way for even greater change.
PSD2 is an extension of the original PSD which was first introduced by The European Commission in 2007, with the aim of regulating Payment Service Providers and creating a harmonised framework across Europe. This regulation is set to increase the number of providers across the ecosystem to enhance the competitive environment with a view to provide greater choice, transparency for customers.
The Directive stipulates that any business that provides and maintains customer account information must make this information available to third parties, such as mobile payments providers, where it has been authorised by the customer. It will force banks to facilitate access to third parties via application programming interfaces (APIs) to their customer accounts. This ultimately represents a significant disintermediation threat for traditional banks as new players have access to a much larger customer base. Banks will have to respond by reinventing the payments experience with innovative ways of gaining customer loyalty as a strategic imperative. Additionally, key elements such as security, liability for fails and fraud, know your customer (KYC) and anti-money laundering (AML) controls will become even more critical as the world of payments opens up to new providers.
What are the implications for traditional banks?
Although PSD2 aims to reduce barriers to entry for new market entrants, it will require third party providers (TPP) offering payment services to be regulated. Just like banks, they would have to adhere to PSD2 requirements much like any other payment institution (licensed, registered and monitored). This means that they would be subject to their own information, transparency and payment security requirements.
Providing a secure infrastructure to TPPs is a major challenge for banks as they need to establish a framework for KYC and to prevent AML to manage the operational risks associated with failed or fraudulent payments and security risks. The traditional players will bear the burden as legacy systems will need to be upgraded from an international payments perspective (further payment data transparency and security are big issues). But it is not just a cost burden for banks. The proliferation of third party providers and new payments market entrants will also potentially impact banking revenues loss and margins. Add to this the EU Interchange fee regulation (which is set to cap interchange fees), there is significant pressure on the traditional commercial models. Furthermore as the value chain opens up there are perhaps even more opportunities to become disintermediated from the end consumer, who can access their accounts through tools such as Apple Pay rather than dealing directly with the bank.
Understanding your customers is key to survival
It has been long debated if banks will exist in their current guise in 10 years’ time, particularly as emerging digital and related technologies and changing consumer preferences put pressure on traditional structures and ways of working. PSD2 has the ability to force banks into a metamorphosis or be left behind as other visionary providers innovate, create closer customer relationships and develop new revenue streams. Simply being tactical is not enough; banks need to think strategically and differently if they are to remain relevant to their current customers and attract new ones.
The banking industry about to go through a monumental change as PSD2 opens up further competition and innovation in financial services. The only way in which traditional banks can ensure that third party aggregators do not steal market share is to create genuine, authentic and emotional relationships with their customers. This means going back to basics to understand customer needs and create value propositions and services that make it easier for them to conduct their financial affairs. Winning the hearts and minds of customers and turning them into true advocates is the only game in town.