PSD2: The Legislation that Will Change Banking Forever
The fundamentals of banking haven’t changed very much in 400 years. Whether it’s Deutsche Bank today or Goldsmith’s Bank in the time of Louis XIV, the basic business model of a bank is to take deposits from customers, keep them safe, and maintain an account of all transactions.
That model is going to come to an end, in Europe at least, on January 13th, 2018. This is the date when the Revised Payment Services Directive (PSD2) goes live across the EU, fundamentally altering the way banks manage customer accounts. It is a bold piece of legislation that promises to completely disrupt banking as we know it.
What is PSD2?
The purpose of PSD2 is, according to the EU, “to protect consumers when they pay online, promote the development and use of innovative online and mobile payments, and make cross-border European payment services safer.”
EU banks will have to create programming interfaces (APIs) that allow third parties to directly access customer bank accounts without going through an intermediary. The implications of this are huge: banks will no longer have exclusive ownership of your account information; and anyone in the world will be able to build a financial services applications that work directly with your bank account.
The infrastructure for PSD2 is not yet fully in place. Supporting legislation referring to communications and data security is currently behind schedule, so full implementation may not be achieved until late in 2019 and, after that, it is up to individual players to begin offering new services and solutions. By 2020, we will start to see major new services come online, possibly even an Uber or Airbnb-sized industry disruptor.
Life after PSD2
PSD2 will accelerate a process that is already occurring in the industry, and traditional banks will be replaced by two different types of entity: fintechs and banking platforms.
Financial technology companies, or fintechs, are the IT companies who are building a new world of banking solutions. We have already seen new market entrants such as N27 and mBank who provide digital smartbanks but this is only the beginning. These tools will evolve, offering customers AI-driven financial advice and helping them to plan their finances in real-time. There is enormous scope for innovation here, which is why the valuation of fintech companies jumped four percent after PSD2 was announced.
Fintechs require an underlying infrastructure, however. Accounts will still have to be held with a bank that is regulated, secure and trusted. This is where existing banks will move to, becoming banking platforms and acting as service providers for fintechs.
Some banks will try to be both, offering both a banking platform and a smart banking solution. Others will either try to acquire emerging fintechs or enter into partnerships. Whatever strategy is adopted, this two-tier model is how European banks will look after PSD2. Banks in other territories will undoubtedly follow.
Are banks ready for this change?
In short, no.
PSD2 is a clear example of the difference between digitization and digital transformation. Banks do not need new technology – they need a new business model based on technology. Any bank that understands this and moves quickly to build a dynamic, reliable platform will have a strong future.
Despite this, a recent survey by IDC shows that only nine percent of financial institutions are aggressively pursuing a digital transformation strategy. Some 70 percent are instead focusing on one-off projects and short-term goals, which is not true transformation. Will these companies be ready to provide the kind of services required in a post-PSD2 landscape? Or will they find themselves becoming a footnote in the history of banking?