The revised Payment Services Directive (PSD2) that comes into force in January 2018 will essentially remove many of the barriers to new players looking to enter the payments market by providing access to customer data and accounts through an EEA wide common legislative platform.
Already under pressure from regulatory change and increased competition PSD2 is expected to further accelerate disruption to the traditional banking model and open the door to competition from Fintech competitors. As such this is a critical moment for banks that need to ensure their tactics are right if they are to safeguard or grow market share and revenue in the context of PSD2 driven market changes.
Tactic 1: Be realistic about the future
PSD2 essentially gives the green light to technology firms to expand their presence in the market. While the complexity and cost of regulatory and compliance issues may make banks an attractive partner for smaller Fintech players involved in the payments market, global technology firms such as Google, Apple, Facebook and Amazon have the financial muscle and customer contact power to potentially go it alone. Factoring such a scenario into strategic and compliance plans now will help banks withstand what could be seismic changes ahead to the traditional banking environment.
Tactic 2: Consider your strengths
Banks that have built up immense expertise and technical ability in payments, regulation and security have the ability to put this into action ahead of PSD2, particularly as the technical standard that allows communication between payment providers has yet to be defined. Indeed, some banks have already implemented open application programming interfaces (APIs) and have committed to providing Payment Initiation and Account Information services ahead of PSD2’s implementation in 2018. While this approach requires mindful restructuring alongside careful navigation of compliance matters, it does give banks the ability to shape the market rather than trying to simply keep up with it, with the added advantage of helping to safeguard customer relationships and revenues. Partnering with Fintechs is an additional or alternative approach for banks who want to strengthen their proposition in a specific direction quickly, or, for example, to reduce the overhead associated with legacy technology issues.
Tactic 3: Rethink physical networks and proposition
Investing in bank branches sounds counter intuitive as banks look to reduce costs, but repurposing existing bank branches as technological hubs with human help on hand is becoming a more appealing way to bank and can help cut clunky operational costs further. Given an unnatural level of State ownership of the sector due to financial bail-outs, it’s also a way of catering for political and societal demand for banking in remote areas. Finally, branches service an ageing population that is not necessarily tech-savvy. As a physical presence is not something many Fintechs have, it gives banks an edge in the near to mid-term. In the long term, looking at whether to play to a bank’s strengths of providing a secure location for deposits and access to funds by focusing on savings and loans rather than competing head on with Fintechs may be a consideration for some banks.
Tactic 4: Revaluate organisational culture
Installing technology incubators is one thing, but moving from innovative idea to an operational implementation quickly and effectively in what is still essentially a conservative banking structure is not easy. The challenge for banks is to assess where functions that are rising in importance such as digital development and innovation sit in the organisational structure. There is an argument that such functions should have a direct reporting line to the CEO and sit at executive committee level so that digital innovation can shape strategic thinking and receive a clear mandate as well as support at top level for digital plans to be implemented. It appears that some banks have positioned these roles in the retail division. However, the Fintech threat and opportunity exists not just in retail but across the banks including for example SME, Corporate and Treasury divisions. In addition, Digital needs a voice at the top table to balance the cultural focus on compliance, risk and security which may slow down digital innovation.
Tactic 5: Treat compliance and strategy as a single objective
Because it opens up the market so much, the arrival of PSD2 puts compliance and strategy on an equal footing, so it’s important that banks assess their response to both simultaneously. This is not necessarily a natural process for banks that are inclined to focus on regulatory compliance. On the other hand, Fintechs are more strategically driven by customer needs so are likely to find regulatory requirements and compliance a burden. Partnering, buying-in or developing the necessary expertise on both sides will be crucial.
The arrival of PSD2 creates a compliance challenge and market disruption that requires strategic consideration, so it’s important to assess your response to both simultaneously. This is not necessarily a natural process for banks that are inclined to focus on minimizing the compliance effort. Banks need to recognize the opportunities PSD2 provides to them. Not just to provide new services, but also to improve current services, by using the PSD2 model to reduce the cost and time of a loan application, for example, by capturing the transaction data directly from the customers current account provider and improve the customer experience?
Over a period of time, PSD2 will undoubtable have a major impact on the banking market. Opinions on what the future landscape will look like and how long it will take us to get there differ. However, one thing is undeniable, the race is on and with the current timescale giving little margin for error, getting the balance right will be key.