“By January 2018 banks must comply with the EU’s second Payment Services Directive (PSD2), intended to improve online payment protection, encourage payment services innovation, and make cross-border payments safer. We’re finally entering the modern age of payments and it’s happening because the regulators are forcing digital transformation through changes such as PSD2, which affects every part of the payment value chain.”
That’s the view expressed by Richard Broadbent, Managing Director and General Manager of Wincor Nixdorf, in his January 2017 Finextra article ‘From contactless to compliance: preparation is crucial for the next stage of the payments revolution’. Earlier on in his article he comments:
“Today, smartphones are the driving force behind a lot of innovation and changing consumer habits. For example, they are playing an increasingly important role in contactless payments, which are booming around the world. In the UK, the amount spent by shoppers using contactless soared by 166% in 2016, with half of Britons now using contactless payments at least once a month.”
Invest to compete
He argues that banks need to do more than simply comply with PSD2. Instead of just complying with the legislation to ensure the security of payments, he says they will need to make significant investments in an open API framework. This is because operational costs are expected to increase to support “API requests for each product of a client and banks will be exposed to revenue loss for interbank payments and customers who choose a more innovative option via an aggregator site.”
Yet there is also the option for banks to invest in the development and offering of innovative services with a view to gain a competitive advantage over their rivals. He says that these could permit them to increase their profitability, and he argues that the banks have an enormous opportunity at their feet to fulfil the key roles that banks play: Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP).
For this reason the banks should, in his opinion, view PSD2 as a value creation opportunity “to unlock new business models rather than purely as a compliance responsibility.” To achieve a competitive advantage and to increase their profitability the banks therefore need seek new partnerships around PSD2 to find a way to innovate quickly, and at such a low cost that they can compete with start-ups. The focus also needs to be on improving customer experience, and they must keep up with digital transformation if they are to ward off the threat posed by the new entrants to the market.
Mark Bowerman, a spokesperson for UK Payments, says his organisation supports PSD2 because it is “a truly transformative piece of legislation for the payments industry as it aims to fundamentally enhance competition in the industry, bring into scope new types of payment services, boost customer protection and security.” He adds in his press statement that PSD2 is expected to improve the accessibility of customer data to third parties whenever the customer explicitly gives consent.
Like Broadbent, he thinks it’s crucial to find a balance between improving the customer experience and payments security with strict customer authentication to allow for the creation of new and innovative payments services. This balance will be achieved in Payments UK’s view by having an Open API standard in the UK.
Bowerman says this will “give customers more information, more control over their data, and it will drive competition by making it easier to assess suitable products and easier to switch providers.” He adds that PSD2 is also seen by the European Union as being a step forward towards a Digital Single Market in the EU. The directive, he says, “aims to make the single market fit for the digital age, and the new measures will also ensure that all payment service providers (PSPs) active in the EU are subject to supervision and to the appropriate rules.” Subsequently, it is believed that PSD2 could open up new markets while encouraging the participation of new market entrants.
These new opportunities are open to a widening range of players: Banks, other PSPs, Fintechs and customers. They will emerge through the development of new products and services – ones that “offer new ways to use account and transaction data”, he explains. He adds that there are numerous regulatory changes occurring in the UK – many of which are relevant to the payments industry. “All of these will need to be sequenced and implemented effectively, in a way that brings the best outcomes for customers while protecting the resilience and security of payments systems”, he says.
Bowerman concludes that there is one key challenge that the UK’s payments industry need to overcome. That’s about finding the most cost-effective way to ensure the best outcomes for customers, and these outcomes need to ideally be delivered as quickly as possible. To achieve this, resources have to be allocated to permit competitive innovation and to maximise the opportunities that emerge from regulatory developments to avoid any duplication of effort. This will also prevent unintended consequence or risks from causing havoc. Instead they can be identified and mitigated.
Regulators are therefore keen to push ahead with digital transformation as part of PSD2. Payments after all have to improve the customer experience while addressing any data protection and data security issues. In a constantly changing market that has seen the entrance of non-banking and non-traditional payments services there is a constant need to innovate. That becomes increasingly possible with digital transformation, and particularly if an open API standard is achieved to allow the consensual sharing of data for new Internet of Things applications in banking and general commerce.
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