What is PSD2?
EU Second Payment Services Directive (PSD2) has been a focal point for the financial services industry over the last couple of years and its adoption is set to modernize the payment ecosystem in Europe. New entrants, innovative technologies and increased regulation are already posing major challenges to traditional banks as they need to do more than ever before to retain their revenue streams, meet growing customer expectations and counter the erosion of their competitive edge.
PSD2 calls for banks to open their data infrastructure to third parties (AISP – Account Initiation Service Provider or PISP- Payment Initiation Service Provider) so that the latter can provide better products and payment services to customers. This is unprecedented and many traditional banks perceive PSD2 to be disruptive, but in fact these new payment offerings have been sprouting for quite some time, powered by the Fintech industry.
What are the Challenges to Traditional Banking?
Opening up an API to 3rd Party (AISP – Account Initiation Service Provider or PISP- Payment Initiation Service Provider) is a great challenge for banks as it might pose concerns around security and personalization of customer data. One big challenge for bank IT teams is that their central applications were not designed with API access in mind. For legacy applications – often based on mainframes – adding API access directly into these systems would be expensive, risky and involve all sorts of unknown scalability issues. Re-engineering applications with API support is possible, but increasing the amount of hardware infrastructure to provide these capabilities represents an expensive way to add this functionality. It also does not deal with the fact that most customer data is spread across multiple silos associated with different accounts. The right solution will surface the way for engagement with both internal and external developers, business insights, analytics, security, and protection.
This means it has never been more essential for banks to offer their customers digital products and services that are effective and delightful. Banks that fail to act on big shifts like PSD2 will lose the primary relationship with clever start-ups, or even worse: to other banks. Either way, they lose, and are reduced to playing a backstage role at best.
Means of Innovation for Bank
Banks that are capable of innovating and executing promptly, have the potential to deliver great new products and services, and become a one-stop finance shop to enrich their omni-channel banking experience.
The new regulation represents an opportunity for banks to partner with Fintech companies and Third Party Providers (3PP) to bring synergy that welcomes change and innovation which will eventually enhance the customer relationship with banks from monthly chores to weekly or even daily meaningful dialog. Banks can take advantage of this regulation to provide their best customer experience by launching new product and services. They can also monetize the API economy by developing a data strategy.
Interestingly, the payments segment has arguably led the charge in adoption of the API economy in financial services. Stripe, recently valued at $1.75 billion, is a payments provider that has API integration as the core component of its business model. It provides a payments infrastructure that is accessed through API calls and is used by household brands in emerged markets.
The API economy has become very profitable for some firms and many commentators and analysts see the profitability accelerating. Salesforce.com, for example, generates half of its USD 2.3 billion annual revenue through its APIs. Analysts estimate that the API economy will become a USD 2.2 trillion market by 2018 and that during the next two to three years, the number of enterprises having an API program could rise by 150%.
PSD2, with its widespread scope, is regarded as establishing a baseline for the future of banking, rather than being a mere regulatory piece. It is a game-changing initiative that will bring along numerous opportunities to facilitate access to payments and help deliver a better customer experience. PSD2 could be transposed into national law by Member States before 13 January 2018, which means that the legal provisions will apply from this date. The next five or so months will be challenging for businesses as they navigate their way towards PSD2 compliance. Panamax MobiFin solution helps financial organizations in many areas including data management, advanced analytics, behavioral profiling, and customer intelligence.