Open Banking and Its Impact on Payments
“Banking is necessary, banks are not”, Bill Gates prophetically proclaimed in 1994. As open banking gains a foothold within the banking industry, banks may find themselves losing to new market entrants.
Not much has changed within payments – until now. With the introduction of PSD2 and the advent of open banking and open APIs, traditional banks, credit card companies and other financial giants may lose their long-held control over payments and risk losing customers to tech-savvy challengers.
PSD2 AND OPEN BANKING
The Revised Payment Services Directive (PSD2) concerns authorities, banks, FinTechs and customers and is a joint European framework for payment services regulation in the EU. Building on the Payment Services Directive (PSD1), PSD2 was introduced on January 13th, 2018 to stimulate increased payment services competition, foster innovation and increase online payments security.
At the heart of PSD2 is the requirement for banks to facilitate information exchange. With the new regulation, banks are required to make banking infrastructure available for third-party providers and grant them access to customer accounts and payment services through Application Programming Interfaces (APIs), or standardised interfaces. This is open banking in practice; the ability for developers to build applications and services around financial institutions.
For consumers, this information exchange allows them to use other payments services providers, making it easier and cheaper to perform electronic payments without credit cards. Instead, they can pay directly from their bank account via online services. Furthermore, the regulation will provide consumers with the opportunity to aggregate all their account information across various banks in one place, making it easier to maintain an overview of their own personal finances.
NEW ROLES IN THE PAYMENTS VALUE CHAIN
Previously, banks have operated in a somewhat “closed” environment with their customers.
PSD2 and open banking, however, creates a level playing field for incumbent financial services providers and new roles in the payments value chain. The regulation introduces two new roles in the value chain:
Payment Initiation Service Provider (PISP): Through PSD2, third-party PISPs can initiate payments directly from the customer’s payment accounts.
Account Information Service Provider (AISP): If the customer consents, AISPs can access customer data to aggregate data on customer accounts across various banks. This enables AISPs to provide an overview of customer accounts as management information.
While PSD2 and open banking provide new and beneficial opportunities for customers, the introduction of new market roles may create new challenges for banks.
THE THREAT FROM NEW MARKET ENTRANTS
Previously, banks have been the primary provider of financial services. With open banking, however, banks find themselves positioned in an ecosystem which includes not only their customers but also third-party vendors and price comparison websites.
PSD2 allows non-banks to enter the market through open APIs, increasing the threat from new market entrants. Unhampered by the same level of compliance and infrastructure maintenance as incumbents, FinTechs and other challengers may have an easier time developing novel and innovative solutions for the banking experience and offer improved payments services, such as contactless and mobile solutions.
Digitally savvy consumers are becoming more interested in faster, more comfortable, cheaper and more accessible financial services offerings. Although traditional banks still enjoy trust with their customers, consumers are increasingly warming up to the idea of using financial products from non-banks. And national and international financial services providers will face fierce competition if tech giants such as Google, Apple, Facebook or Amazon, who excel in meeting digital consumer requirements, enter the market.
MOVING BEYOND PSD2 COMPLIANCE
Banks will no longer compete only with other banks; they will compete with everyone offering financial services. Traditional banks who are unable to leverage the opportunities in PSD2 and open banking, risk becoming core services suppliers and losing the customer contact to more digitally enabled market players.
Greenfield: Traditional banks are usually limited by legacy IT systems and organisations, creating little wiggle-room for developing innovative and novel solutions. Instead of building new systems upon legacy technology, banks can use greenfield technology development as a way to start anew. This approach involves putting the user experience first and developing new solutions in a new environment without any constraints from legacy systems.
Collaborating with FinTechs: Both incumbent banks and FinTechs could benefit from working with each other. On the one hand, incumbent banks can offer FinTechs large customer databases, nationwide networks and massive amounts of customer data. On the other, FinTechs can bring advanced analytics and digital channels to the table, helping create better customer experiences.