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Revised Payment Services Directive (PSD2)

The Revised Payment Services Directive (PSD2) is the catalyst causing a step change in the industry’s perception, understanding and willingness to embrace Open Banking. While it is a European directive, it has implications beyond Europe because of its intent to increase competition and innovation in the industry for the ultimate benefit of the end-customer. 

What is PSD2?

PSD2 prescribes the opening of account information to third parties, such as aggregators of customer financial information across multiple institutions, or payment providers. In order to protect themselves from the consequent risk of losing their direct relationship with customers (disintermediation), banks are likely to respond to the directive by not merely complying, but by exploiting the directive to create new business models aimed at creating new and deeper relationships with customers and at generating new revenue streams. Some banks may become account aggregators and/or cross-institutional payment providers themselves. Others may choose to become back-office manufacturers of banking products leaving the customer relationship to others. Beyond PSD2, open banking could lead to the rise of platform models for banking services where banks act as market intermediaries connecting customers, manufacturers and distributors. 

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While banks will be obligated to provide account and payments information that has always been considered proprietary by them, and to facilitate payments from third parties, third-parties too will face more regulation on data protection that will boost user confidence in the legitimacy and reliability of their services. 

The ultimate aim of PSD2 is to drive competition and foster innovation by creating a level playing field for banks and new entrants alike, enabling easy-to-use and secure digital payment services that benefit consumers. Below are the key provisions of the PSD2.

The Temenos solution architecture enables our clients to not only be easily compliant with the directive but also to provide the necessary support for any of the new business models that our clients might choose to embrace. 

How should banks respond to PSD2?

Level 1 - Be Compliant

Banks provide access to account and payment data as required by law to third parties via both APIs and ISO messages, fulfil transparency requirements by providing required payment information to the payer both before and after the transaction, support one leg transactions where one PSP is outside of the EU/EEA, and support the security and authentication standards provided by the European Banking Association (EBA). Banks that decide to merely comply, are in danger of becoming a utility while the customer experience could be owned by the third parties.

Level 2 - Monetise Access

Banks provide access to additional data and insight beyond what is stipulated by PSD2 and charge for it, creating new revenue streams e.g., non-payment account data for loans, mortgages or savings, standing orders, direct debit mandates. The data could also be provided more frequently at an additional charge e.g., balance updates for cash management provided hourly or each time the balance changes. Banks are still in danger of being disintermediated by third-parties.
Banks following a Level 2 PSD2 strategy can optionally create API marketplaces where API providers can publish open APIs that can be accessed and consumed by third parties, whether developers, peer-to-peer lenders, aggregator sites, accounting software providers, telecoms, utilities or even governments.

Level 3 - Become an AISP or PISP

Banks become either an account information provider or a payments initiation service provider using insights from own and third party sources to provide additional value-added services to customers. In addition to providing financial services, banks take on the new roles of becoming access facilitators or distributors of third party products and services to their own customers, value aggregators of own and third-party products and services, and advice providers based on a 360 lifetime view of the customer. The availability and transparency of information from third parties in addition to the vast customer data they themselves hold, will enable banks to use the power of predictive analytics to truly differentiate their offers versus non-traditional competition.

Beyond PSD2 - Platform Plays

The EBA Open Banking report* mentions that open banking and PSD2 will lead to the eventual creation of banking platform business models Platforms generate value by facilitating the exchange, provision and delivery of financial products and services between multiple suppliers and consumers, leading to improved customer experience, innovation and growth. Open APIs have a network multiplier effect by expanding the number of products and services that can be created and consumed. All platform value propositions are predicated on the advanced analytics capability that the platforms own and provide to all parties.
API-based plug-and-play technology architectures in banking can support different platform business models – manufacturers, distributors or B2B platforms

* EBA Open Banking Advancing Customer Centricity March 2017 Analysis

Where Europe and PSD2 lead, we expect much of the rest of the world to follow, and have therefore designed our solution from a global perspective.

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