With the new EU payments directive, it’s sink or swim time for Europe’s banks, believes Oliver Lynch, director of Business Development at Comtrade Digital Services.
The financial services market is undergoing immense change, catalysed by technology and software innovation. While many financial institutions – particularly newer ones – have been quick to embrace change and use it to their competitive advantage, others have been less quick to do so.
With a deadline of January 2018, however, the new EU Payments Services Directive (PSD2) will see that every EU bank is digitally up to speed. As that deadline inches closer, competition for banks will increase, while customers will benefit from reduced costs.
The global payments industry is currently dominated by the duopoly of Mastercard and Visa, along with the incumbent banks that issue their credit cards and provide payments services such as direct debts or wire transfer. PSD2 aims to shake up the status quo by driving innovative thinking – thus opening the sector up for new players to enter and increasing competition amongst banking institutions.
The directive mandates that if requested by the account holder, banks must give third-party payment providers (PSPs) access to their systems and client current accounts. The account holder will then be able to bypass the bank and credit card companies– and their charges – and pay for services by dealing directly with the new PSP.
PSD2 aims to shake up the status quo by driving innovative thinking – thus opening the sector up for new players to enter and increasing competition amongst banking institutions
The result will be enormous disruption in the payments world. E-commerce sites will start to display a PSP option along with the usual payment options, such as credit card or Paypal. Meanwhile, large, trusted global brands such as BA, Ryanair, Tesco or Ikea could become PSPs and enable their clients to buy their services without incurring credit card charges. Tech giants, such as Apple and Google, could also become active in this new market.
BANKS HAVE A CHOICE
According to estimates, some 20% to 25% of incumbent bank revenues are at risk from the new competitors that PSD2 will facilitate.
Forward-thinking legacy banks, however, should view it as an opportunity. They, too, will have the ability to access client current accounts in other banks, allowing them to target those banks’ client bases.
Incumbent banks, therefore, have a clear choice: compete aggressively and thrive in the post-PSD2 environment, or see their revenue streams erode
By coming up with new, innovative business models and partnering with companies who can address the requirements of a particular market segment more efficiently, banks could find themselves a niche in the market.
Innovative financial institutions will also seek to embrace digital transformation within their business and use technology to drive better customer experience and cost savings across their operations.
They are preparing to be part of the API economy, whereby third party applications (such as credit card companies, new payment providers or Facebook applications) can connect to core banking systems quickly. They are the banks that will be best prepared to counter the new and increasing volume of nimble competitors threatening their revenue base.
Incumbent banks, therefore, have a clear choice: compete aggressively and thrive in the post-PSD2 environment, or see their revenue streams erode.
THE CHALLENGE FOR BANKS
The challenge for banks is how to implement the required changes in their legacy IT systems. Those systems are the core of every incumbent bank’s operations. They are complex, costly and time-consuming to change and one of the main reasons why banks cannot adopt more agile business models to drive their business forward and compete with the new wave of fresh-faced fintechs.
Comtrade Digital Services’ Unified API platform provides banks with a framework that enables them to comply with the new PSD2 requirements and compete in a new ultracompetitive environment. The use of our Unified API layer allows banks to deliver a much-enhanced customer experience and engage third parties with the expertise that will help them thrive.