By Jonathan Woods | 27 July 2016 | Part of Zafin’s Explainer Series
In the first article in our series on the European Union’s revised payments directive, Payment Services Directive (PSD2), we discussed how banks must adapt their reporting systems to comply with PSD2’s new rules on transparency. In this article, we’ll break down how PSD2 creates a new payments structure across Europe, along with some of its profound competitive implications for banks. Advance warning: Prepare to be hit by a torrent of new acronyms.
PSD2 focuses on updating and harmonizing regulations, definitions and data protection in payment services across the EU to give access to, and level the competitive playing field for, the wave of third-party payments service providers (TPPs) – often innovative fintechs – that has appeared since the introduction of the original Payment Services Directive (PSD) in 2007.
Technological innovation in financial services has been furious in the last decade, and limitations in the original PSD led to challenges for TPPs looking to provide pan-European solutions. An Accenture report summarizes these difficulties as follows:
- “Each country [had] different rules around third-party access to citizens’ accounts, so existing services [were] largely localized by country.”
- “The unregulated status of these services under the original PSD [had] created uncertainty that probably acted as a brake on their growth.”
- “Banks [were] under no obligation under European legislation to grant these services access to their customers’ accounts.”
Seeking to address these challenges by enhancing competition, PSD2 effectively has two main objectives: Increase transparency and increase access. Transparency was discussed in the previous article on reporting standards. Here, we’ll unpack the meaning and implications of increased access to payment services.
PSD2 gives TPPs access to customer accounts for payment initiation and account information services. This ‘Access to Accounts’ (XS2A) means customer accounts managed by banks must be opened for aggregated displays of financial information and payment services by third parties that have gained customer consent. PSD2/XS2A splits up the payments value chain into several distinct service providers, each represented by its own (phonetically unfriendly) acronym.
Understanding the players in the new payments ecosystem
Within the PSD2 scheme, the two types of access mentioned above – to payment processing services and customer account information held by banks – pave the way for two new types of third-party providers: Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs).
|Account Servicing Payment Service Provider (ASPSP)||These are the banks that hold customer accounts, and are required by PSD2 to allow access to those accounts to TPPs through an open application program interface (API).||Any EU Bank|
|Payment Initiation Service Provider (PISP)||With approval from the customer (often referred to as the Payment Service User, or PSU), PISPs have the ability to initiate payments on the customer’s behalf by accessing the customer’s accounts through an ASPSP’s open API. Typically, PISPs focus on e-commerce transactions, linking the merchant to a customer’s account.||Sofort, Trustly, iDEAL|
|Account Information Service Provider (AISP)||AISPs act as aggregators of a consenting customer’s financial information across all accounts and financial services institutions, enabling the display of that aggregated information on some kind of customer-facing dashboard.||Mint, Yodlee, Money Dashboard|
Figure 1: The PSD2 payments model
Source: Accenture, Welcoming a new phase of Everyday Payments in Europe
These service providers, while mutually exclusive, can originate from the same company. For instance, a bank (an ASPSP) can set up a subsidiary that acts as a PISP. Figure 1 below outlines an updated view of the payments scheme under PSD2.
Implications for banks
The fragmentation of the value chain and increased access to accounts and customer data is being touted as the foundation of a new digital financial ecosystem, and financial services companies must adapt before they become marginalized. The consequences for banks falling behind fintechs and other TPPs in digital innovation are dire. As Barclays ex-CEO Antony Jenkins has said, “The incumbents risk becoming merely capital-providing utilities that operate in a highly regulated, less profitable environment, a situation unlikely to be tolerated by shareholders.”
Obviously, the ability for third party providers to initiate payments directly from a bank’s customer account is cause for distress among bank management. For one, fees will be impacted. Where the previous payment scheme saw a beneficiary bank in a place to receive a request to complete – and charge for – a transaction to a customer’s account, PISPs can now insert themselves into that space.
While not European, Royal Bank of Canada CEO David McKay likely spoke for most global banking CEOs when he said in a speech to a New York audience last year: “The last thing anybody wants is to have someone between you and your customer, and that’s what we now have in the payments space.”
The new payment scheme presents at least two glaring challenges for incumbent institutions. The first is that as non-bank PISPs grab market share, the banks lose payments operations as support for other products and services. The second is the full range of data now available to analytically-apt fintechs bent on nibbling away at banks’ payments business.
According to Gartner, incumbent retail banks will fall into two main categories in the new digital ecosystem:
- Those that incorporate PISP or AISP capabilities to add value to current offerings; and
- Those that become marginalized as commodity-type businesses competing primarily on price.
For those banks looking to avoid becoming commodity providers competing on price alone, embracing the digitization of banking, participating in the digital ecosystem, and building a strategy to incorporate PISP or AISP capabilities is mandatory.
In Part 3, we’ll examine some of the strategies banks can use to avoid relegation to the role of commodity, and instead position themselves to capitalize on PSD2 before it comes into effect in 2018.
About the author: A regular contributor to techvibes.com and Relationship Banker, Jonathan Woods is a technology journalist based in Vancouver, Canada.