5 things you need to know about PSD2

  • Posted on January 18, 2018
  • Estimated reading time 5 minutes

The following blog post was written by Avanade alum Jerome Thiebaud.

The second Payment Services Directive (PSD) has already catalyzed innovation, upturned the status quo in Europe’s financial markets, and piqued the interest of legacy banking institutions—and it’s only just been launched. PSD2 was passed by the European Union in 2015 with the goal of creating safer payments and sparking innovation in the financial services market. EU members were called upon to implement the legislation by January 13, 2018. 

The most significant change brought by PSD2 is that banks are compelled to give third-party financial providers access to a customer’s online account/payment services in a regulated and secure way. This is no small change: many bankers fear they will lose control of the customer touchpoint. For example, retailers will be able to process payments directly with their clients without needing to go through their bank.  While that possibility is now in sight, banks and other financial institutions should consider the myriad opportunities to benefit from the new regulatory environment. 

PSD2 does not affect only European banks. Financial institutions across the globe, especially those that do business with banks located in the EU or the UK, will want to keep a close eye on how the regulations were adopted and comply with the new rules when selling services in Europe.

Here are 5 things you need to know about PSD2, its short-term and long-term implications, and innovations companies have already implemented to take advantage of the new reality:

1. PSD2 requires a fundamentally new approach to IT development
From the perspective of banking customers, the transition to open banking feels natural. In a survey of 1,000 German consumers, 85% of respondents reported trusting alternative payment services like Amazon to handle cash transfers. Already, eMoney companies like PayPal, Venmo, and Number26 have adopted an outside-in, customer-centric approach to IT development.  With easy-to-use mobile interfaces, these companies have attracted and earned the trust of consumers, and, thus, are well-poised to grow in the post-PSD2 environment. 

Moreover, among 1,000 UK consumers surveyed, many respondents exhibited preferences that challenged the normal way that banks market their products. For instance, the price of services and the features offered by banks, which are normally key deciding factors when considering financial services, were not as important to respondents as a hassle-free customer experience, mobile-optimized interfaces (apps), and high-speed transactions. Consumer preferences have changed dramatically. Even without PSD2, evolving market trends demand a major adjustment to your current business model run by legacy infrastructure.

Adapting quickly to consumer preferences can be difficult, but many developers are creating tools to help banking businesses adapt. For instance, the Azure API sandbox, hosted on Microsoft Azure, allows your organization to experiment with various value propositions and to experiment with customer journey prototypes before launch. 

2. Banks must standardize access to data
Commissioner Jonathan Hill called the PSD2 legislation a “step towards a digital single market.” As part of this initiative, banks are now obligated to standardize access to customer data and banking infrastructure. However noble the purpose, this scale of standardization will cause significant logistical issues for large financial institutions. Fast-tracking API innovation will be key for these companies to keep up with early adopters. For example, Avanade and Accenture’s API management accelerator offers a self-contained, virtual environment for market testing. Standardizing access to third-parties may be a bane for large banks, but it doesn’t have to be a nightmare.

3. Security is top-of-mind
Among the major hurdles involved with the first Payment Service Directive were diminished security due to exemptions that left users unprotected. With the second installment, security for online payments is top-of-mind. Starting January 2018, users accessing APIs must undergo multi-factor authentication. That means demonstrating two of these three features: knowledge, possession, and inherence. Banks should contact experienced advisors that can support and help define their API strategy, architecture, and security impact. 

4. The new payment environment will be powered by APIs
PSD2 hinges on a critical connection between retailers and banks. This relationship will be powered by APIs, which, in turn, can be implemented by a wide range of organizations including corporate banks, card issuers, and eMoney providers. What does this mean? Strong partnerships with developers will prove instrumental in creating competitive advantages in a broadened market. The organizations that create easy-to-use personal banking interfaces with the power to securely aggregate diverse financial information will lead the post-PSD2 marketplace. With tools like the Azure API sandbox, which allows bank employees to accelerate the deployment of working API prototypes, banks can easily develop a competitive advantage.

5. Champion CX as the way to unlock PSD2 opportunities
For every challenge PSD2 creates for financial institutions, it opens up new opportunities. Banks may see compliance and standardization for third-party providers as an obstacle, but 88% of consumers already use third-parties for online payments. So really, PSD2 is a nudge for legacy institutions to join the future. There are several ways to generate value in the post-PSD2 environment. The number one action a bank can make right now is to invest in customer experience (CX). PSD2 is a customer-centric law, so adopting a strategic, customer-led environment will prove beneficial.  Financial organizations can also generate value by:
Adding third-party capabilities to core offerings
Cross-selling and exploring new markets like personal finance management
Capitalizing on consumer behavior and storing consumer preference data accrued by the APIs.
Making the multi-factor authentication process as easy as possible for the customer

Banks and other financial institutions are faced with an important choice in 2018: comply only minimally with PSD2, or embrace the future of open banking with innovative tools that will help you out-maneuver competitors. Now is the time to seize the opportunity created by PSD2. Now is the time to transform your banking business. 

Download your free copy of "PSD2 and Open Banking" from Avanade, Accenture and Microsoft to uncover new banking opportunities, business models and revenue streams for your financial institution.

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