PSD2, or Payment Services Directive 2 as it is lovingly known, triggers a broad range of emotions from financial institutions (FIs) – ranging from glee, hope, annoyance, and anger to straight fear. The FIs that are happy (there are many) tend to be payment institutions (payment providers (PP), third-party payment providers (TPP) and payment institutions (PI)). The ones that are downright worried are mostly the banks (i.e. credit institutions) . The reason? Two words: customer data.
How is Payments changing?
The global payments industry today is in a state of flux, with a confluence of trends in technology, business, global regulatory environment, and consumer behavioral patterns redefining how payment transactions are executed. The business landscape is being transformed by agile payment providers who are exploiting technology innovations in mobile wallets, location intelligence, biometrics, big data, banking APIs etc., and a growing class of FinTech players.
Governments around the world are embracing digital payments and updating regulations to promote non-cash payments and ensure consumer protection. The European Union has been spearheading such efforts to drive disruption in the industry – democratize access, enhance security requirements and spur competition with the upcoming PSD2.
PSD, why 2 ?
Established originally in 2009 as a new legal framework for payments effective across Europe, PSD implements the same common standards and rights for service providers (non-banks) who collect money on behalf of the bank. The rapid changes in the past few years in the payment market led to PSD2 which sets the stage for open banking by providing standardized access to customer data, enhancing payment security and lowering the barriers to entry for TPP and FinTech.
So it’s all good, right?
It is not that simple. The expansion of regulatory purview to include new kinds of payment providers may not be that problematic, and neither the limitations and restrictions on transactions costs for consumers. Customers do benefit from:
– Convenient payment options
– Secure transaction verification and fraud prevention
– Enhanced visibility into activity and accounts
– Reduced transaction costs (fees)
The central issue that is most disruptive is the requirement for banks (i.e. credit institutions) to open their payment infrastructure and customer data to 3rd parties.
Innovation and Inconvenience?
I like to call it disruption.
The first and biggest disruption comes in the form of Open Banking. This requires banks to open up online services via an approved API (application program interface) to provide access to TPP acting on behalf of the customer. These APIs can be great drivers for digitalization initiatives and can eliminate the current methods of data sharing, that are prone to be insecure and expose customers and those TPP to a data breach. On the other hand, data fed through API with tokenization will eliminate open credential-sharing but will not be ubiquitous across a wide array of FIs. There would be a lot of 1:1 data agreements that add to legal and technical costs and limit the scope of the ecosystem.
But more and more banks see PSD2 in a broader context – as a fundamental disruptor in the global financial sector. It is seen as a force towards open banking and the ability for banks to be the tip of the spear as a “financial concierge” (like my friend Jonathan Noel calls it) and focus on how they can drive innovation with the data. The API model acts as a catalyst for further digital service offerings and extends the cross-selling,which increases the number of transactions that drive more revenue.
The second disruptor takes the form of trust and security. Strong customer authentication is a key to tighten privacy and data protection rules for TPP to prevent customer’s financial data from being abused or stolen. Rightfully so, the upstart TPP/FinTech are concerned that banks will make it harder and create channel barriers. But multi-factor authentication models and dynamic risk-decisioning are already driving a better and safer customer experience. Risk-based solutions providers already leverage real-time transaction data to enable their customers make better risk decisions while minimizing the friction to the end customer.
Is there a common thread?
Yes, it’s called customer data. The value nexus lies in the specific ability to transact that customer data. Simply put, customer data needs to be exposed to many players across many services at a much faster rate and all of that securely.
A data layer that is always available and super high performant is the big step. They help in two ways: 1) access and 2) decisioning.
Performant Systems of Engagement (SoE) reduce the need for frequent access to data into existing Systems of Record. It also needs to scale endlessly to support stateless API from numerous TPP and payment entities. Another way these data layers help is on dynamic and real-time decisioning on risks. Transactional risks are evaluated more and more using real-time data on-the-fly across a multitude of factors. Having an ability to do this fast in sub milliseconds could be the difference between customer abandonment and delight.
Now, we all want delighted customers, don’t we?
For more information:
- How real-time decisioning is transforming the digital payments landscape – Digital Payments
- How transactional analytics is driving Business Moments in digital payments – eBook
- How a Global Digital Payment provider improved fraud detection and reduced false negatives – Case Study