On 13 January 2018 (this Saturday), the second Payment Services Directive (PSD2) will enter into application across the European Union. This means that all banks in member states will be forced to open up their customer data and payments infrastructure to third-party providers, at the customer’s request. The regulation is set to shake up the banking industry by allowing businesses not traditionally associated with finance – such as tech and telecoms firms – to provide services usually offered by banks.
Most importantly, individual banks will no longer have a monopoly of their customers’ data. Technology and legislation is opening up the market, creating a more competitive environment, where customers can find the best deal for them.
This is a huge and highly complex change for the sector. In fact, five major UK banks have already been given a deadline extension to get ready for the new regulation, due to issues with releasing data sets by the specified date. And with so much scrutiny and theorising about what this will mean to the industry, what are the top three myths surrounding PSD2?
PSD2 will spell the beginning of the end for traditional banks
Wrong. The shape of the industry will change dramatically, but forward-thinking banks who embrace the change will enjoy first-mover advantage. Indeed, early adopter banks can be the heroes and reap the commercial and reputation benefits of delivering a better service to their customers. Those that don’t embrace the opportunity will find that consumers go elsewhere to enjoy more competitive products.
Key to success will be to reshape their products according to customer needs. Customers now have a huge range of personal finance management options to choose from, yet rarely are these offered by the banks themselves. Offering them in-app will help ensure continued bank use and ensure the bank keeps up with competition from third-party actors.
Looking further ahead, we will also see consumers giving their providers the power to automatically switch them to the best product. Investing in the technology and the power to innovate via partnerships with fintechs will allow banks to be winners in the new world order. Yes, the banks will face greater competition from all sides, but at the same time the open banking era will encourage greater collaboration between fintechs and the traditional banking sector as they both wake up to the enormous opportunities that lay ahead.
PSD2 will compromise the safety of customer data because banks will have to share with third parties
Wrong. But with regular stories of data hacks hitting the headlines, it’s no surprise that some consumers are feeling a little nervous about sharing their banking data with third parties. However, stringent measures are in place to protect customer data, and fintechs and other third parties are subject to the same scrutiny and compliance requirements as banks. Any third party wanting to participate in open banking will also need to be authorised to do so by the FCA.
Providers – traditional banks and the fresh-faced fintechs – also need to earn consumers’ trust. Actions speak louder than words here, and firms will have to work hard to win customers over.
PSD2 will for the first time allow data to be accessed via banks’ APIs
Wrong. Technology is well ahead of the legislation. A number of fintechs have already been accessing and aggregating this data for years through reverse engineering or screen-scraping banks’ APIs (at their users’ request). This is perfectly legal, and simply starts with a desire and consent from the end user.
Legislation is now playing catchup with technology. For some savvy financial services providers, the new directive is little more than a legal rubber stamp for tactics they’ve been using for years to deliver a better service for users. The difference is that PSD2 officially puts rightful ownership of data in the hands of the individual and enables customers to compel banks to share this data with third parties. But this is also a huge opportunity for the banks who get it right, helping them to build loyalty and increase the range of financial services for their clients.
With banks under pressure from third-party actors, and consumers who can now easily choose to bank with providers that give them a better solution, PSD2 is an opportunity to come out as a winner for those who dare to innovate. As technology and legislation open up the market, we will see a more competitive environment benefiting consumers and banks.
READ NEXT: A primer on open banking
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