April 7, 2016
PSD2 (payment service directive) is expected to disrupt the European banking industry. The fundamental goal of PSD2 is to reduce cost and increase competition from non-traditional players (payment service providers). PSD2 aims at reducing the entry barrier for a FinTech firm and to enhance consumer protection and convenience. PSD2 heightens the prospects for FinTech firms who are in the business of providing payment services by giving them access to the customers. For the banks, the Access to the Accounts (XS2A) rule will impose the need to have a standardized API in order to facilitate third-party access to any bank account in the area.
Banks who were previously owners of customer’s bank accounts will soon have to share this information with third-party apps provided the account holder wished to do so. As a result of this, banks may lose absolute control of the customer accounts. In these circumstances, banks have two strategic options excluding the one where they do nothing.
As a strategy, banks can just act as a transaction processor. Though the margins in this case are lower, it is still worth considering, especially for large banks that can generate large volumes. Contrary to this, banks can also aim to innovate and provide other value-added services over the minimum required compliance.
Banks as third-party payment service providers: In order to safeguard one’s business and gain access to non-customers information, banks could position themselves as third-party providers seeking access to customer accounts with other financial institutions. By doing this, they will be able to deliver a range of services and could potentially cross-sell their products even to customers of competitor banks.
Banks as service providers to smaller banks:
Banks can also choose an option to position themselves as service providers to smaller regional banks, FinTech firms or challenger banks and charge them a fee for the same.
Value-added services: Analytics is one such opportunity for banks to capitalize upon. Banks can concentrate on the analysis of transaction data that could be valuable to other market players seeking to create new sales opportunities. Banks might also look to augment revenues by providing bare minimum services required for compliance and charging for other value-added services. A very good example of this could be the sharing of the FICO score and credit history of a customer for a fee which as such is not a mandatory requirement under PSD2.
Opening up APIs and partnering with FinTech: Retail banks are under the risk of becoming dumb pipes with FinTech firms using the data and services of these banks as a platform to engage with customers. However, some large banks in the European region have recognized these opportunities and are turning themselves into a platform by partnering with FinTech firms.
BBVA is one of the first banks to do so. In 2014, the firm had also acquired Simple to augment its tech capabilities. The acquisition helped BBVA offer customers a data-rich analysis of their transactions. For this purpose, BBVA has started external partners from Spain to assist them in the creation of an API. The partners are expected to be potential users of the API, i.e., from the FinTech community. The approach of BBVA adds more credibility that banks and FinTech will have to work together going forward. It's great to note that BBVA is taking this measure proactively much ahead of the deadline.
On the same lines, the Germany-based Fidor Bank offers a standardized set of RESTful APIs. With Fidor, each user can receive a specific customer ID and associated bank account. Deploying the Fidor API, requests can be made for third-party payments or transfers. Single transactions, as well as batch transfers or direct debit withdrawals, can be made using a single API-driven procedure. Web-based requests can be made to retrieve user information such as ID & customer email. The API enables developers to access general account management features. Likewise, Turkish bank Garanti has also opened up its API to the external community. The bank has introduced a mobile dashboard called iGaranti that lets users cherry pick the features of their mobile banking apps. Similar initiatives have been taken up by other European banks such as Credit Agricole, a French bank creating an online marketplace to crowdsource ideas for new banking apps while Deutsche Bank offers an app store for its corporate clients. Going forward, it will be worth seeing how many banks go ahead and partner with FinTech firms to go digital! I think this is the time to also engage with FinTech startups in a massive way.