PSD2: In the future will we all be paying via Facebook or Google?

5 April 2017

In the future, will consumers still be paying with their bank card or will they handle all their payments via Google, Facebook or Apple? It might sound like a strange question, but as European Directive PSD2 enters into force it is certainly becoming a pertinent one. In this article I will explain what PSD2 is and what consequences there may be for banks when PSD2 takes effect.


What is PSD2?

The European Payment Services Directive (PSD) regulates the supervision of payment service providers, their rights and obligations and those of their users. On 8 October 2015 the European Parliament decided to amend the PSD with a new version (PSD2). The most important change is article 66. Specifically, this change means that new parties entering the market will be able to offer banking services. One of the effects of this is to force banks to allow parties with a payment licence to access the details of the customer’s payment account, if the customer has explicitly given consent for them to do so.

The changes in PSD2 must be implemented into the national legislation of all EU Member States by 13 January 2018. The changes relating to payment account access are expected to take effect in the first half of 2019.


Before and After PSD2

As it currently stands, banks have huge amounts of payment data at their disposal and can offer payment services directly to their customers. Banks provide these payment services via their own internal “application programming interfaces” (APIs). The API is the standard way for different software applications to communicate with one another.

Once PSD2 has entered into force, banks will have to also build a public API in addition to their internal API. Other parties in the marketplace that hold a banking licence can then use this public API to develop new services for customers.

A specific example of the kind of innovation that can appear as a result of the PSD2 legislation is the “aggregator app”. This is an app that gives a user access to all their payment details at multiple banks. Users of this app therefore no longer need to log in with each bank separately for each payment account, but can manage all their payment accounts in a single statement.


What are the implications of PSD2?

PSD2 is expected to have a huge impact on the customer experience and therefore on the future bank-customer relationship (Gartner, DNB, 2016). It is expected that a large number of new parties will enter the market, and they are expected to improve user-friendliness. Consumers will have more choice and better products for lower prices.

At the same time there are also various risks: third parties having access to payment and account details means there is an increased risk to privacy. For example, imagine a fast food chain that will be able to see from payment details how often you eat at their competitor’s restaurants.

There is a real risk for banks to lose their insight into and contact with customers and therefore their opportunities for cross-selling. Of course, offering a payment account often leads to selling other products such as investment funds. Banks will also have to modify or replace their operations systems.


Active or reactive, two strategic choices

Gartner argues that after PSD2 takes effect bank that focus on private consumers may be split into two categories:

  1. Banks that use PSD2 proactively to offer extra added value for customers.
  2. Banks that respond reactively and only offer commodities and compete on price.

Banks that adopt a reactive strategy will only do what is absolutely necessary to comply with the PSD2 legislation. One of the risks associated with this strategy is that other parties such as Google or Apple use data from these banks to offer their customers a platform offering perfect customer experiences and the banks only supply data to third parties.

Banks that adopt a proactive strategy will seek to collaborate more with third parties and try to use their public APIs to offer innovative services to their customers. This can be done, for example, with a “bank as a platform” strategy, where banks offer their customers some form of app store. Other parties can then build apps that offer customers innovative solutions and offer these apps in the app store.

Which strategy is appropriate will depend on what the bank’s objectives are. But it does seem to be clear that if banks want to keep control over their contact with customers and the customer experience, they would do well to adopt a proactive strategy. Otherwise there is indeed this danger that their customers will move on and handle payments via other parties.


Integrated View of Customers

The PSD2 legislation makes it relatively straightforward to aggregate payment details which are often fragmented across all the banks, therefore building an integrated view of the customer. Having such a customer view like this offers many opportunities for customers, as long as it is analysed and interpreted properly. Consumers will be able to receive better guidance than they do now based on their transactional banking data, e.g. to establish a healthy balance between their incomings and outgoings. Or to receive proactive advice on particular patterns of expenditure. The question is whether they want to entrust this advisory role to their current bank. It is no accident that many banking customers keep accounts with several banks. It gives “third trusted parties” the opportunity to perform this role. The key word here is trust. Despite all the efforts the banking sector has made to increase that trust, it is still at a depressingly low level.

Subscribe to our newsletter

Never miss anything in the field of advanced analytics, data science and its application within organizations!