The finance sector is constantly balancing the desire to innovate with the need to remain compliant; no easy task. The latest legislation shift that is challenging financial organisations is rolling out the Second Payment Services Directive (PSD2), which will become EU law in January 2018.
But rather than being the latest round of red tape, PSD2 presents some important opportunities, particularly for fast-growing FinTech companies looking to increase their market share. This legislation will help organisations to offer Open Banking in the next five years – and 44% are ready to move to this model, according to PwC data – but not all businesses are currently embracing the full benefits that PSD2 will enable.
Ripping up the rules on payment data sharing
PSD2 will shake up the European payments industry, so naturally many businesses may feel apprehensive about the changes ahead. No longer will banks be able to monopolise data; under PSD2, merchants will be able to access consumers’ banking information, with their permission.
This is great news for FinTech businesses, as it will open the gates for greater competition, rather than enabling the industry to be dominated by a few big banks. Plus, the new regulations demand greater transparency when processing international payments, which will prevent larger banks and brokers hiding transaction fees within poor exchange rates.
Additionally, under the new PSD2 rules, merchants will be able to make payments on behalf of the customer – without having to redirect them to a third party payment service provider (PSP) such as PayPal – creating a smoother customer experience, conducted entirely within their brand website.
This move towards Open Banking will have a positive knock-on effect for FinTech challengers, as the legislation enables third parties to access a bank’s API, bypassing the compliance and infrastructure demands usually placed on the host.
While many established banks will have IT efficiencies and legacy technologies to address in order to fully embrace the changes made by PSD2, younger, emerging companies have the technical dexterity to capitalise on the benefits, quickly. Already, start-ups like German FinTech firm, Figo, are benefitting from huge investment as the result of developing game-changing banking APIs.
Consumer change doesn’t just come in coins and notes
One important influence on the rate of change in finance is the consumer – and the good news is that PSD2 will benefit them, too.
Anyone with multiple bank accounts will be able to access all their information in a single place, rather than having to treat them as separate entities. And given that a fifth of Britons feel money worries impact on their health, according to MoneySuperMarket, this increased visibility will help them to manage their finances better.
Prepare for the battle of the banks
The best thing about PSD2 is it fits emerging FinTechs’ ethos of enabling innovation and rapid response to what the customer wants. One of the main complaints consumers make about big banks today is that their digital platforms are not particularly user-friendly, and new players can address those concerns.
However, that’s not to say big banks cannot rise to the challenge – they may lag behind the new breed of PSPs when it comes to data analysis, security and communications, but they have the scale to meet changing legislation, and bring greater customer-centricity to their business.
Additionally, the advent of PSD2 will enable banks to build and test new business models incorporating third-party integration, providing them with deeper data-driven insight to create new products and services, and expand into new territories. There is an opportunity here for collaboration with forward-thinking tech partners, and a warning to challenger banks not to rest on their laurels.
Using PSD2 to drive customer-centric change
While PSD2 appears to be a winning development for financial businesses and their customers, it’s important that finance companies do not view this legislation in isolation.
For true success, PSD2 needs to be considered within organisations’ broader digital transformation strategy. And at the heart of that strategy lies the customer – both how they want to pay for goods online, and how they want to digitally manage their finances.
As an agile software solution specialist, Black Pepper Software can help your finance business embrace the opportunities that PSD2 is creating. Visit our finance industry page to find out more.