The Payment Services Directive 2 (PSD2) is an update to the EU rules put in place by the 2007 Payment Services Directive. It came into effect on January 13th 2016 and will be applicable after a two-year transition period, on January 13th, 2018.
Sopra Banking argue that the PSD2 calls for a deep strategic revision by market participants. The company’s new report attempts to analyse and quantify the impacts of the PSD2 on daily banking revenues.
The reactions to PSD2 among bankers vary wildly. At one end of the spectrum, a Head of Payments at a Tier 2 bank declared ‘Access-to-account? Over my dead body’ (in 2016!). Others such as BBVA for instance, are leading the way with a series of PSD2-inspired APIs and an open marketplace. To some extent, this range of reactions reflects a misunderstanding of the directive and its meaning for the European banking sector.
Many institutions are focusing on the details of the regulation but miss out the fundamental issues at hand. Given the magnitude of the upcoming changes, minimal compliance is a very risky choice indeed. Financial institutions need to start revisiting their strategies now in order not to miss the possibly short window of opportunity to respond.
Sopra Banking predict daily banking and payment revenues to decrease as much as 20% for certain institutions over the next five years, especially for the smaller banks that apply a purely defensive strategy. Proactive and potentially transformative strategies can offset these risks and, more importantly, generate substantial opportunities.
Sopra Banking expects new players to take advantage of the new opportunities that PSD2 offers as soon as it comes into effect, that is, at the start of 2018. For all participants the time to act is now.
Options, Impacts and Necessary Steps to Implement them
In essence, the PSD2 separates the distribution of banking services from their production. This opens the door for new entrants to provide almost any kind of banking products and services under lighter regulation. In effect, PSD2 is a gateway to open banking and to Banking-as-a-Platform.
Reacting to PSD2 calls for visionary strategies, as well as decisive actions. The winning banks will be those that launch the bold strategic moves to address the shortcomings of today’s dominant offerings and take advantage of the new opportunities PSD2 offers.
Benefits from PSD2:
- The combination of new tools will allow banks to better serve specific customer segments
- With more advanced APIs, banks could position some of their products and services via PISPs and AISPs
- Running an API suit will become a daily commercial process for a bank
- The emergence of aggregators will drive innovation and change the way customers approach banking
- Platforms offer a way to scale the concept of partnership and to monetize the Fintech opportunity
- Vertical to horizontal competition
Retail banks today have very similar target segments and portfolios of services. With a few exceptions, almost all institutions provide a full services offering targeted to very similar customers. Quoting the former CEO of a Tier 1 bank Sopra once worked with, ‘we offer all products to all customers through all channel’. For most banks this situation is not sustainable anymore and a significantly different landscape might emerge in the coming five to ten years.
The future of banking appears open. Likely large banks will position themselves as the main financial agent of their customers, a Dutch bank’s CEO said ‘we see ourselves becoming a financial services supermarket, operating more like a broker’.
Other trends appear for the future in retaliation to the new regulations such as smaller banks seeing this as an opportunity to refocus on their core activities and become profitable specialists in their chosen customer and/or product segments, thus seeing the market eventually undergoing a form of specialisation. Another trend we see in the market is the increased willingness of banks to put aside their rivalries at one level to cooperate.
Banks can either compete by offering best in class products or find other ways to add value. One way to add value is to take an essential and important role in the everyday life of customers by becoming advice providers, value aggregators and access facilitators.
One of the main challenges that financial institutions will face is finding a successful business model in daily banking. This will require changes in the way existing products and services are priced and how new services will be monetized. In addition to the traditional role as financial intermediaries, banks have the opportunity to bring additional value to customers by offering some of the services that fintech have started to provide within and beyond financial services.
As most aspects of banking therefore can be disintermediated, banks must focus on their core assets that cannot be easily replicated: regulatory compliance, trusted intermediary, identity management and authentication services, data analytics, account management and ability to hold funds, risk management, treasury and cybersecurity.
As a result, Sopra Banking anticipates these factors to lead to or accelerate the consolidation of the sector as a whole.
- The PSD2 fragments not just the provision of payments services, but the banking value chains
- The distribution of financial services becomes open to non-banks
- Retail banking revenues could decrease by as much as 20-25%
- Banks possess core functions and capabilities that bundled together provide strong added value
- Maintaining full proprietary service in-house activities will become unsustainable
- Banks will remain indispensable but their roles and business and operating models will evolve
- The battleground will shift from service delivery to maintaining loyal customer relationships.
The whitepaper can be downloaded here: http://www.soprabanking.com/en/market-insights/article/2016/11/29/psd2-more-a-future-of-banking-than-a-payment-directive