PSD2 Directive and Bank 4.0 – is it the end of direct contact?

PSD2 Directive: right here, right now and all for me

Our lives have become increasingly fast, with constantly growing number of things to deal with every day. We expect that all the processes we are taking part in – information, sales, transactions and other – will go smoothly, without any major obstacles. We do not want to waste our precious time, we want all things to be instant.

We want customization

We feel better when the messages we receive are direct, personal. Speaking other words, we do not like to be a part of an undetermined group of people, the mass. Every single person is an individual, different from others, and on many levels. We want the digital world, based on information technologies, to take advantage of data potential. We expect customised solutions to suit our individual needs and requirements. We are eager to trust the entities who respect us, and provide personalised content and services. We are waiting for products and services customised, according to our unique imaginations.

What does “bank” mean these days?

Just like the very word, which may be translated in several ways, meaning of bank – with regards to financial institution – is undergoing a significant change. We no longer visit outlet branches, we manage our finances using applications on our smartphones, we make instant transfers to people on the other side of the world, we buy things on-line, using payment service providers, we use loan comparison engines. Money has become digital. Within only a decade, nobody will think about a physical branch, when thinking “bank”.

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PSD2 Directive – revolution and evolution

The PSD2 Directive, which enters into force in January 2018, will be the driver of changes in the financial market. Its impact on banking and payment services is already quite tangible. At the same time, in United Kingdom the “Open Banking Standard” was published. New law will enable development of tools, products and services not even jet existing. But, in a decade – they will shape our reality. Preliminary technical guidelines for new directive (RTS – Regulatory Technical Standards) left no doubt that the present role of banks – is coming to an end.

They will be forced to give up their most precious information: data volumes, regarding our accounts and payment infrastructure. They will be exposed to TPPs – third party providers. Through proper investments, solutions and technology support, banks can keep a significant role as operators of payment processes. But, giants such as Google and Amazon are gearing up to enter that market, too.

Thanks to PSD2 Directive, companies that we do not jet consider as “banks”: on-line stores, shopping platforms, portals and social networks – will become some kind of “banks”. “Banking” will be simply one of our everyday activities. It is entirely possible, that many of the existing banks will go out of business.

 Read more:  3 steps to PSD2 – is your bank ready for the change?

Dyrektywa PSD2 sprawia, że bankowość stanie się usługą oferowaną przez różne firmy.

New financial units

PSD2 Directive brings new opportunities, regarding money management and direct payments. This aspect is defined in the Directive, by new business categories: AISP and PISP.

AISP (Account Information Service Provider) – or “money manager”, subject that holds account information. Among AISPs, we will have banks (we naturally entrust them our account information, so it will remain this way – at least during first years after the Directive), as well as other organisations and businesses. They will provide us with brand new experiences, when it comes to expense planning, savings, transaction history or investing our money. Even today, we can already imagine and tie those activities with terms such as Virtual Reality, Augmented Reality and gamification. It is all ahead of us.

PISP (Payment Initiation Service Provider) – subject that provides payments made directly from our accounts. The emergence of payment operators will limit or fully eliminate card payments. Among the main players, there will be on-line stores and well-established payment operators, such as PayPal. With time, new business models will emerge for this type of service, as proven by PayPass or Blik transfers.

What is an API?

Digitisation is now mostly connected with something called an “API”, which is an abbreviation of Application Programming Interface. Some people tend to talk about functioning in an API economy. APIs enable connection between numerous services, databases and applications, even, or especially when they are based on different technologies. They serve as a bridge over the technological gaps in our global economy, created by the variety of software and the multitude of solutions employed within companies. APIs are like robotic translators, communicating with each other, exchanging information using various programming languages. Banks will use APIs to provide access to our sensitive data, so third parties canuse them, for our convenience.

Power of data

Perhaps, it will be easier to explain how an API works, by analogy to an electrical socket.
Placed on the wall, it is a connector allowing us to bring electricity to external devices. Both the socket, and the devices we want to connect, need to meet given specification, regarding: the position of holes and prongs, proper grounding and voltage.

The PSD2 Directive specifies what kind of data should be made available through the APIs of every bank registered in Europe, how it will be exposed and to whom. Obviously, the amount of shared data can (and should) be bigger, because this will allow new services development and stimulate innovation.

In the past, banks were devoting a sizeable part of their resources to build and maintain their system. Still, their integration with external systems was time-consuming and expensive. Today, this approach is changing thanks to APIs. Fintech startups need to develop their solutions faster, cheaper and in collaboration with other companies. Thus, APIs work like keys: “Here are the keys to my system, make yourself at home, together we can build something bigger!”

With banks, the financial data is the electricity, API is the socket and third party operators, customers and other banks are connecting to it, using their plugs. Obviously, this infrastructure is much more complicated, for every entity participating needs to have both a plug (or a number of plugs), as well as sockets. The communication between APIs is possible thanks to a standardised set of rules.

Dyrektywa PSD2 określa, jakie dane, w jaki sposób i komu powinny być udostępnione poprzez API banków w Europie.

What about security?

Banks will be strongly focused on the security of their data, which is another element that is specified in the Directive. We need to be sure that our funds are safe and secure. In the surveys regarding customer preferences, the respondents pointed out that the banks would be institutions that they would entrust with being both AISPs and PISPs. This is obviously connected with the trust to the well-known brands. And, makes a great opportunity for the banks, but will they be able to take advantage of it?

Cybercrime is a constant risk for the banking sector. The emergence of new ways to access financial data and a number of new services, will lead to an ever-increasing number of attack vectors. Security becomes the benchmark of a positive customer experience with a service – the need to authenticate several times due to security concerns, may be frustrating and disheartening. Minimising authentication, combined with stronger payment security is one of the requirements of PSD2 Directive.

In the upcoming years, we can expect the development of digital identity, universal authentication and multi-layer authentication. Authentication methods, such as iris scan or fingerprint scan – will become commonplace. Additionally, the blockchain technology currently developing, will be extremely helpful in protecting our money and data.

Focus on users

Customers are not yet aware of the potential brought by the PSD2 Directive. However, we can be sure, that we are constantly in the centre of attention. Our individual decisions and preferences, our everyday challenges are the focus of the entire commerce and financial sector. Organisations already understand, that there is no such thing as a “mass” of users. They are trying to adapt and facilitate our everyday activities by customising their services to our needs. In this environment, who will succeed? Those who manage to do it faster.

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Open banking

Banks are already in the process of opening up. The new banking started quite some time ago. The companies classified as Fintech (financial technologies) are now permanent element of the new economy. The monopolists are disappearing, making room for smaller enterprises, niche ideas and products aimed at smaller social groups.

The Banking-as-a-Service (BaaS) concept is based on offering banking services using an external data layer, allowing the entire ecosystem of Fintech companies and other service providers to connect with it. This way, financial institutions that are not banks, will be able to offer better, modified and often cheaper banking services. And us, the customers, will get a better, customised final product at a better price. What is good for the customers, will be even better for the market, since diversity was always a background for innovation.

 New Directive responds to the needs of ever-growing (and so far disorder) market segment, regulating the issues of security and access to the accounts. It sets standards pertaining to authentication and establishes minimal data sets, which are to be shared by banks through their APIs. The revolution in banking sector started much earlier, PSD2 is simply going to push this transformation further.

What will happen with banks?

In January 2018, banks will lose their monopoly on servicing our money. Two of basic banking services:  balance check and transfer making, allowing a direct relationship with customers – will become generally available for other businesses and will no longer be connected with the banks. As soon as Fintech companies take control of them, they will take their customers.

Banks have basically two options: first one is  to ignore PSD2 altogether and keep developing their on-line banking and a network of outlet branches, hoping that the customer will keep coming to them. Is that a good idea, though?

The customer does not need on-line banking, mobile banking or a meeting with the advisor at a branch. What the customers need, is access to their money, loan or transfer in the context of a current process, happening here and now. When they purchase a home, they need a loan. When they buy a book, they need to make a transfer. Thus, the customers will look for partners who offer the most affordable services, and expect to be able to do it with one click.

The priority aim of the change is to include the banking service in the business process, preferably in a fully automated manner. Just like various loan and payment options, that appear when we want to buy something on-line.

Here we move on to the second option: bank will stop developing its on-line banking services and a network of outlet branches and instead, focus its entire attention and resources on the development of new channel – API. It will keep opening up for collaboration with developers and Fintech companies, as well as establishing its own technology companies, thus becoming a next generation bank.

In this race, created by new law, consolidations will be necessary. We will have fewer banks and those left on the field, will be pushed to join forces or invest a lot into adapting their infrastructure. If they do not survive as universal service providers, they might be able to specialise in niche products. Only next generation digital banks and banks 4.0 will survive – those who understand the “API economy” best and know that this is the end of an era.