20th January 2017

PSD2 Implementation: Banks Can Ill-Afford To Wait And See

By Cianán Clancy

On October 8th 2015, the European Parliament adopted the revised Payment Services Directive (“PSD2”). Following that decision, EU member states will have two years to introduce the necessary changes in their national laws to comply with the new regulations. In this article, we will take a look at the implications of PSD2 implementation for banks, why they must be proactive and look at this as an opportunity instead of a cost as well as some strategies that banks can look at in order to take advantage of this opportunity.

First, let’s take a quick overview at what exactly the PSD2 entails. Under this directive, banks will be obligated to allow third-party providers (“TPPs”) access to customer data and its payment infrastructure. This will be done via the use of application programming interfaces (“APIs”). This will have a significant impact on how online payments will be conducted by eliminating the middleman. For example, currently when a customer makes a purchase on Amazon, Amazon has to go through a merchant acquirer (e.g. WorldPay) and a Card Scheme (e.g. MasterCard) before reaching the customer’s bank (e.g. Lloyds). The implementation of PSD2 will remove the merchant acquirer and Card Scheme and enable Amazon to liaise directly with the customer’s bank, theoretically saving consumers money.

In this example, Lloyds Bank is referred to as the Account Servicing Payment Service Provider (“ASPSP”) while Amazon is referred to as the Payment Initiation Service Provider (“PISP”). PSD2 will also allow TPPs to function as Account Information Service Providers (“AISPs”), aggregating all of a customer’s banking details from various banks onto a single platform. For instance, a TPP could be a AISP that allows a customer to view and manage all of his or her banking accounts across multiple banks using a single platform.

A recent PricewaterhouseCoopers survey showed that a majority of banks view PSD2 as threat to their business. However, PSD2 needs not to be looked as a threat but an opportunity for a bank to use its own internal APIs and those of other banks to act like their own startups - using their skills to sell abroad in new markets. Let’s take a look at three examples, UniCredit Bank, Starling Bank, and Number26.

Italy’s largest bank, UniCredit launched Buddybank in February 2016. Buddybank, scheduled to begin operations in January 2017 will be a smartphone-only bank, offering modular current accounts, credit and debit cards, and loans, all through its API. The bank even intends to provide concierge services via phone and WeChat to help customers with things such as taxi hailing, travel planning, and even restaurant reservations. Buddybank intends to position itself as a single access point for everything relevant to a customer’s life; this will allow it to charge various TPPs to provide other services through its API, which would be another revenue stream for the bank.

Starling Bank is a new mobile-only bank in the UK that seems to already have its PSD2 strategy mapped out. Starling intends to allow its customers to execute payments across all the customer’s bank accounts, consolidate them under Starling’s platform, while also giving the customer a Starling bank account of their own. By doing these, Starling will be a PISP (execute payments from customer’s other bank accounts), an AISP (bank account consolidation), and an ASPSP (its own bank account), all at once. As Starling is a licensed bank, it is necessarily held to a higher regulatory standard and the bank believes that this will prove to be an advantage in its favour by increasing customer confidence and trust.

Number26 is an app-based pan-European bank, launched in February 2013 and already boasting more than 160k accounts by April 2016 with over a million transactions processed per month. It offers speed and convenience (customers can use the video function on their phone to open bank accounts and obtain credit cards in minutes), one-click money transfers between individuals via SMS or email, and a dashboard allowing customers to manage every single detail regarding their accounts. Its business model relies not on fees from its customers but from TPPs that pay to offer their products and services on its platform.

While many banks look at PSD2 as a threat to their revenues, the three examples above show how banks can take advantage of PSD2 to gain additional revenue from TPPs instead. Forward-looking banks are already moving fast and while there is no guarantee that even the most well-positioned banks will benefit economically, the banks’ best option is to move fast, establishing systems, platforms, and partnerships that will give then the highest chance of being net benefactors from PSD2’s implementation.