PSD2 creates opportunities for FS
PSD 2 came into effect over the weekend, putting a greater focus on digital payments and providing an opportunity to make financial services an intuitive part of everyday life.
Online services for delivering electronic payments through means such as real-time transfers, digital cash and credit cards are now the norm in today’s society.
These payment services offer flexibility, efficiency and lower costs for consumers completing monetary transactions. The value of payments for service providers is not in these transactions but in the context information that surrounds them. Understanding the context in which a consumer makes a payment is invaluable in being able to predict or even influence future purchase decisions. Increasingly, payment service providers are reflecting on the use of this data and its resulting value for the consumer agenda.
Processing large volumes of payments alongside gathering and analysing the associated context information could provide significant competitive advantages for service providers. Linking in related offers, marketing or advice at the right times is insight that provides greater opportunity for new services. Carefully balancing this with an awareness and respect for data privacy will sustain trust with consumers – something that is critically important for success.
What is the legislation?
The first payment services directive (PSD) came into force back in 2009 to establish common rules across the European Economic Area. It was designed to help consumers make cross-border payments easily and safely. However, with the acceleration in the digital economy since then, increasing numbers of consumers now opt for leading-edge payment methods over traditional cash, meaning this directive is now outdated.
Quite rightly, the European Commission recognised this and introduced a new directive on payment services (PSD 2) in late 2015 to put more focus on digital payments. When it becomes applicable in January 2018, it will bring various provisions including strengthening consumer rights, promoting innovative payment services, and enhancing protection against fraud and other payment problems.
Why is it important?
Building trust through strong customer authentication is critical in responding to PSD 2 requirements. In many respects, this will serve traditional banks well because they are already trusted to look after consumer data. However, the freedom and flexibility that is also being introduced around payment services means there is a reduction in customer interface.
PSD 2 should be seen as much more than a compliance project – it is a genuine opportunity to make financial services an intuitive part of everyday life and to provide value to the consumer agenda.
Emerging FinTechs will be able to obtain PSD 2 licenses that allow them to initiate payment transactions and analyse customer account and transactional information. Existing providers in the sector cannot refuse to give access to consumer data to licensed third parties. Therefore, they must embrace working with them and find a way to manage and govern their open Application Programming Interfaces (APIs) that link to these third parties without resorting to prohibitive controls or restrictions.
PSD 2 should drive greater consumer choice around payment methods, create better information for consumers and demand greater innovation from service providers. Ultimately, the aim is to increase competition, while further strengthening consumers’ rights and security. As demonstrated by the recent Worldpay and Vantiv merger – creating a wide-ranging payment service provider – only the bold and imaginative will succeed in this environment.
How can this be approached?
It is clear that some existing providers are resisting the openness that PSD 2 requires around consumer data. With the introduction in 2018 of the General Data Protection Regulation (GDPR) as well, this is understandable as the GDPR will require stringent data protection and privacy controls to be in place, and enforces significant penalties on those who get it wrong.
Despite the apparent contradictions, institutions need to embrace PSD 2 and define the role they want to play in the consumer cycle. It is possible to take a risk based approach that balances data and consumer security with the opportunity to evolve and innovate. Removing silos around data management, integrating regulatory initiatives and maintaining the right audit trails will all be key.
Putting cyber and data privacy at the core of any implementation is imperative given the value placed on trust. Similarly, deciding what capabilities and innovation a provider wishes to support will be key decisions. Many traditional service providers are not currently set up to have the agility needed to lead on innovation and should determine whether to use PSD 2 to accelerate digital transformation and drive the necessary cultural change.
PSD 2 should be seen as much more than a compliance project – it is a genuine opportunity to make financial services an intuitive part of everyday life and to provide value to the consumer agenda. Those who harness the data to drive more sophisticated services and capture the customer’s imagination will be the ones who have the greatest success.
Thomas Pulling is a Director at PwC leading Data and Analytics in Scotland. Having recently returned from the Middle East, Thomas has global experience in risk, compliance and technology across Financial Services and multiple other industries.