PSD2: A Matter Of Aggregation

As the date for the full adoption of the revised Payment Services Directive (PSD2) draws closer, financial institutions are ramping up efforts to systematically align business practices to closely follow the directive. The directive, which has been pictured as disruptive, was initiated in response to the evolving payments landscape and to propel improvements in payment services across Europe. But as businesses in the EU gear up for the full adoption of PSD2, a major event occurred - Brexit. Britain’s exit from the EU raised fresh questions regarding its impact on businesses that operate within UK and the EU. All things considered, how will PSD2 likely be affected post-brexit?

With the UK out of the EU, there are both direct implications - to banks who use London as their European headquarters - as well as wider repercussions to the financial services industry. Furthermore, PSD2 extends its scope towards one leg-out transactions, in which it will govern transactions in any currency as long as either party’s Payment Service Provider (PSP) is located in the EU. This effectively puts any transactions UK has with EU countries within the PSD2 remit.

Beyond these apparent ramifications, many pundits are of the view that the directive still holds much importance for the UK. To put things into perspective, the key driver for PSD2’s implementation was technological, not political. PSD2 serves to bridge the gap between the technological developments within the payments and banking industry as a whole - thus, UK banks should not put themselves in a position where they may be left behind. Ignoring the PSD2 mandate will quickly place UK banks at risk, as larger banking groups that are capable of operating in the EU as well as the UK can effectively leverage on the unified platform to provide superior customer-centric services. Along with the Competition and Markets Authority (CMA) open banking proposal, PSD2 will remain very relevant for UK banks who want to thrive post-brexit.

Opportunities in PSD2

Banks and financial institutions are faced with two options - to simply comply with PSD2 at the bare minimum, or to leverage the opportunities that the directive may present. The former will result in banks regressing into just a ‘utility’, whereas if the latter approach is taken, they can become the aggregators of choice.

Banks that decide to comply to PSD2 at the bare minimum will risk losing their existing customers to new entrants that are able to provide superior user experience. Conversely, strategic investments in open APIs can uncover opportunities for partnerships between banks and third party provider. Such partnerships can manifest into either a consolidation of services, where services owned by third parties are offered by the bank, or consolidation of data, where customer data stored on third party systems are presented on the bank’s portal.

Currently, data aggregation platforms, such as Yodlee, have the capability to provide simple integration with banks through partnership agreements, or the more conventional but significantly less secure screen-scraping methods. This business model is built on revenue from selling the data created from the customer base.

Banks that engage in the right long-term digital strategy and build partnerships that support it can transform their online banking portal into a one-stop-solution platform that fully supports the customer's complete financial requirements, even outside the traditional banking space. Earlier this year, Bankhaus August Lenz introduced a solution that integrates with its online banking system and personal finance management solution. The partnership with Crealogix allows the bank to aggregate both bank and non-banked assets to create a comprehensive digital client consulting solution that offers transparent data in the areas of financial investment, retirement provision and risk hedging.

The PSD2 has revealed many opportunities for both banks and their FinTech counterparts. A theme that consistently emerges from the directive is that of aggregation, and how it has the potential to greatly influence the financial landscape. In fairness, aggregation does not come without its own set of challenges. However, banks need to understand that aggregation is increasingly becoming a standard, and securing the first-mover advantage will be fundamental for their success. The bank that gets to be first - either in-house or through partnerships - will be viewed as the aggregator of choice, and in doing so, enjoy customer loyalty and data.

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