Summary: There has been much debate between incumbent banks and payment FinTechs on the PSD2 account access rules which are also commonly referred to as “open banking”. It is fair to say that neither side seems to find the rules being implemented satisfactorily. However, there may be a middle route to make the PSD2 open banking work for both sides.
The Payment Services Directive (EU) 2015/2366 (“PSD2”) sets out the framework on how payment initiation service providers and account information service providers (known as “third party providers” or “TPPs”) may access certain payment accounts of a customer held at other account servicing payment service providers (essentially, banks) in order to provide their own services to the customer; such access is expected to be provided via the relevant application programming interface (“API”). There has been much debate ever since around these third party access rules which are also commonly referred to as “open banking”. On one side, banks are accused of having adopted a defensive approach and treated the rules as a minimum compliance exercise (i.e. “open” only to the extent strictly required by the letter of law). On the other, TPPs are arguing that the regime is not “open” enough (e.g. only “payment accounts” being covered, which leaves out many other types of accounts such as normal savings accounts).
Alongside and connected with the debate, much has also been discussed about the potential FinTech revolution that PSD2 open banking would help instigate in the payments industry. This article however wishes to contribute to the debate by focusing on the potential opportunities that PSD2 open banking may bring to banks, particularly incumbent banks. “Banks” discussed below are intended to refer to incumbent banks as they are currently the main account servicing providers.
In today’s increasingly digitalised world, user data (or more precisely commercialisation of user data) seems to be quickly becoming the ultimate source of all things from business generation to revenue growth. Due to the nature of their business, banks sit on an extraordinary amount of customer data, from credit records, transaction histories to spending patterns. PSD2 open banking offers a perfect opportunity for banks to take better advantage of this vantage position.
Generally, TPPs would very much like to access not merely payment accounts and information falling squarely with PSD2 but also other accounts and additional data, in order to provide better services to their customers. For instance, the main attraction of the account information service is so that a customer can have information of “all” their accounts aggregated in one single place. As outlined above, a TPP may, as a matter of law, only access certain “payment accounts” and information that is necessary for it to provide a particular service (e.g. initiating a payment transaction). While TPPs may, in addition to the in-scope access via the relevant API, use the so-called “screen scraping” to access out-scope accounts (such as normal savings accounts), such an approach is invariably fragmented and may not offer the best customer experience. It may also present operational challenges to TPPs.
This is where banks can come in in exchange for a share in the payment value chain. Banks may offer TPPs access to additional accounts or information beyond what is strictly required under PSD2 by entering into e.g. some form of revenue-sharing arrangements with TPPs. There is nothing in PSD2 that prevents banks from coming to such commercial arrangements with TPPs in relation to accounts or information beyond the scope of the open banking rules. In addition, more often than not TPPs are new entrants to the market and may need assistance with respect to marketing or back-office supports. Banks are also well placed to offer such additional services, as part of the arrangements, including marketing the TPP’s services/products to the bank’s own customers and providing fraud checks or other administrative supports to the TPP. All in exchange for a share in the payment value chain.
By so doing, banks could open an additional income stream and stimulate future revenue growth. Accenture recently published a study on the impact on banks by digital disruption, which claims that in Europe (including the UK) 20% of the banking and payments institutions are new entrants and have captured nearly 7% of total banking revenue and one-third of all new revenue since 2005. Therefore, it seems crucial from a long term perspective for incumbent banks to seize every opportunity given the threat on their revenue growth. It could also benefit consumers and merchants who would have more choices to make and receive, respectively, payments and to manage their financial affairs more efficiently. Such benefits seem to be among the reasons behind the publication by two of the European retailer associations (Ecommerce Europe and EuroCommerce) of an open letter to the European Commission calling on it to expand the scope of the PSD2 open banking rules. Further, as consumers and merchants are mostly served by those same banks, better customer satisfaction would in turn mean better customer retention. It may also lead to new customer generation. For example, a consumer may switch their accounts to a bank that is better “connected” with a popular TPP the consumer wishes to use from a bank that is not. At the same time, there is nothing to prevent banks from also offering their own account information service or payment initiation service in competition against the TPPs. Competition and cooperation do not have to be mutually exclusive.
Another practical benefit for banks to embrace this approach now rather than later is that at the present TPPs generally have a fundamental vulnerability in their business model. That is, their business relies entirely on an external party (i.e. banks) without whom they cannot or cannot effectively provide their own services and TPPs do not have much of a choice in terms of which such external party to use (that choice is already made by the end customers). This could give banks leverage in terms of any commercial negotiation. However, once TPPs become established (which may invariably be the case given the technological development) or other account servicing providers (including challenger banks) become significant, that vulnerability may not matter as much as now.
There will of course be implications in terms of costs and risks if banks choose the sharing approach. For instance, incumbent banks tend to have significant legacy systems. Updating such systems and developing a good API may involve investment. From a risk perspective, there will also be issues with the EU data protection requirements, anti-money laundering, counter-terrorist financing and fraud prevention etc. However, those do not seem to be insurmountable. The cost and risk of not doing so may arguably be greater, not least because challenger banks may fill the vacuum. In addition, just as PSD2 “forces” the current open banking regime on banks, it is possible that, given the technological development and innovation in the payments industry, future legislation or regulatory guidance may impose a broader “open banking” regime. If such legislative/regulatory changes ever came to pass, there might be little room to manoeuvre in terms of commercial arrangements. By that time, some TPPs might also have become so established that incumbent banks might have to partner with them but with less commercial flexibility. Therefore, it is argued that the long term benefits seem to outweigh the short term pain.
It should be noted that such a sharing approach may require incumbent banks to re-think their business model. Currently, incumbent banks tend to be of a vertical full service model where the bank provides all services by itself. Incumbent banks may wish to consider re-positioning as more of a horizontal “platform”, where in addition to selling its own services and products the bank could also facilitate TPPs (or other third parties in a wider sense) to sell their products/services through its platform. By becoming such a platform, banks may be able to have more say in e.g. the form and manner in which such TPP services/products are provided to the customers (subject to compliance with relevant competition laws) and at the same time to have a share in the value chain. Further, this long term “platform” approach could also help banks become an indispensable and integral part of the value chain (much like the position of the card schemes with respect to card payments).
There will no doubt be difficulties in adapting to play the long game in the light of the lightening-paced development of technologies in the payments sector. However, precisely because of the ever changing technological, regulatory and commercial landscape, a long game may be the only game that matters.