Finding a strategy amidst PSD2 uncertainty
By James McMorrow, Head of Payment Strategy, Global Transaction Banking, Lloyds Bank
In Europe the deadline for PSD2 compliance is fast approaching and whilst many Financial Institutions (FIs) are working towards the target date of 13th January 2018, uncertainty continues around the exact requirements for the implementation of the Regulatory Technical Standards (RTS) including Access to Accounts (XS2A).
Lesser known, but of equal significance, the introduction of the Competition & Markets Authority (CMA) remedies and in particular ‘Open Banking’ in the UK will also provide customers with the option to share banking data and initiate faster payments with regulated organisations. Affecting the CMA9 (9 largest UK banks, who are mandated to comply with the legislation) Open Banking is designed to promote competition, account switching and innovation within the domestic UK financial services market.
In a stark contrast to the uncertainty of standards under the RTS, the appointed Open Banking Implementation Entity (OBIE), who has been working collaboratively with the industry, has defined Application Programming Interface (API) standards for both account information sharing and payment initiation, ready for implementation on the 13th Jan 2018. This may provide the UK with the opportunity to provide the first Open Banking solutions, but may itself create complexity if European standards are found not to be compatible with the UK.
The cause of uncertainty
PSD2, and specifically XS2A, will enable regulated third-parties to access client bank account data (specifically for transactions and balances) and instruct the account-holding institution to initiate payments. Whilst under the CMA remedies, the Implementation Entity has already mandated the use of APIs as the communication channel, the proposed approach mechanism under the RTS is still unclear. As the European Banking Authority (EBA) is proposing to replace the current screen-scraping model with a dedicated API channel, but the European Commission (EC) is proposing that Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) can access the Account Servicing Payment Service Provider’s (ASPSP) customer interface as a fall-back in case the dedicated interface is not performing as required under the RTS screen-scraping model. The implication of this is that ASPSPs potentially may have to offer one, or both channels for communication with AISPs and PISPs
FIs must choose a strategy
As the EBA has admitted, achieving the correct balance and trade-off between security and access is a challenge. Whilst each bank will need to work through the implications of the current status of RTS, the lack of clarity makes it difficult for FIs to identify their optimal route for compliance.
In the light of this, it may be helpful, in addition to the regulation, for FIs to also consider the future needs of their clients, how they can support these, and what new solutions their clients will require.
The known effects of an API economy
Through the introduction of API and other technologies, where we have seen the necessary ingredients come together to create successful open ecosystems, incumbent players have faced strategic choices as to their approach. Within industries such as travel, retail and insurance, a number of successful models have been identified. One is to work with aggregators. This has been seen in the airline industry with the rise of firms such as Expedia or Lastminute.com. Alternatively, some players, such as retail pharmacy company, Walgreens, have chosen to become the aggregator, and others, such as UK insurance company, Direct Line, have remodelled and now only sell directly online.
The strategic and product development impact for FIs
Whilst the exact direction of the development of an API economy for European FIs is unknown, these other industries have shown us that adoption can lead to growth opportunities. Dependent on the client base, the models referred to above, and more, may be viable. If FIs truly believe that Open Banking and PSD2 will be successful, consideration should now be given to the most beneficial strategy to support future client needs.
Those that adopt technology strategies which embrace Open Banking and the API economy could find opportunities to expand the reach of existing products and even be inspired to develop new solutions and market places.
The market beyond Europe
Outside of Europe we have seen the development of solutions without regulatory intervention, the US in particular has been successful in developing platforms such as social media, eBooks and internet browsers, and it remains to be seen whether competitive pressures in the absence of regulation will be sufficient for this to translate into financial services.
Finding the solution
Given the uncertainty that still surrounds the implementation of RTS and PSD2, complex choices for FIs remain. It may be that looking beyond the regulation, to future client needs, may provide the answer to the best strategy.