One of the most discussed and analysed pieces of European Union financial legislation will finally be transposed into national law on 13 January 2018. But will the world change with the arrival of PSD2? Or will the financial industry – banks, corporates and customers - have to wait even longer before the effects are felt?
“PSD2 will fundamentally change banking as we know it forever. It is not a fad. Banking will be different in 2018, when banks have to open up to third parties that offer services to account holders,” commented Erik Zingmark Co-Head of Transaction Banking at Nordea earlier this year.
“We view PSD2 as an opportunity, which is why we have made a significant effort in the building of the Open Banking platform. We see possibilities to offer our customers new services together with partners, and we could offer our customers services in geographies beyond our home region. Large corporates today often have relationships with banks that are not strategic but serve to give access to daily banking services in specific regions. Such relationships may not be needed in the future.”
An interim period awaits
But while PSD2 officially comes into force on 13 January, not all EU member states are likely to be able to meet this deadline for implementation. A small number of countries, such as UK, Germany, Denmark and France, look certain to transpose it into their national laws in time. Many others, but not all, have draft legislation in place.
Additionally and crucially, it was only on 27 November this year that the European Banking Authority (EBA) and the European Commission delivered an agreed version of the EBA’s Regulatory Technical Standards (RTS) on Strong Customer Authentication (SCA) and Common Standards of Communication (CSC). The Regulatory Technical Standards (RTS) have an 18-month implementation period, meaning they will only be applicable in September 2019.
Gunnar Berger, Nordea’s Head of Open Banking, explained: “It’s a bit of a strange period in front of us in terms of PSD2. It is an interim period, as we call it, between January 2018 and September 2019. In September 2019 everybody will definitely know what PSD2 is about and over time, things will settle down and some kind of market practice will start to appear.”
PSD2 is NOT Open Banking
But when it fully kicks in, PSD2 will have a large impact as it is designed to increase competition by promoting innovation and creating a more level playing field for payment service providers (PSPs) or third party payment service providers (TPPs). It will make it possible for Payment Service Providers and forward-thinking banks to bypass existing proprietary digital channels to access customer banking data and payment services on behalf of the customer.
PSD2 will also have an impact on the corporate segment and on how a future treasury will function. It is likely to give impetus to the ongoing innovation boom and bring customers more user-friendly services through digital integration. This is likely to improve not only the payment experience but also the underlying initial service.
However, PSD2 itself is merely a facilitator and certainly not the big story, according to Berger: “PSD2 is very important and very interesting, but it is a regulatory issue with the purpose of increasing competition in the market between non-banks and banks. We are not seeing PSD2 as the big thing. The big thing is Open Banking.”
So where do PSD2 and Open Banking connect
Under PSD2, banks need to allow approved third parties access to the payer’s and payee’s accounts (on request), strengthening their offerings in areas such as merchant collection services. This third party access interface is connected through Open API (Application Programme Interface) Banking, commonly referred to as Open Banking.
“I think many people actually say that PSD2 and Open Banking are the same, and for me they are definitely not,” continued Berger. “PSD2 is designed to increase competition but Open Banking has a very different purpose. It will actually increase collaboration between the non-banks and banks. So from that perspective they are having the opposite effect. Open Banking is a new way of thinking and a new way of working in product development.
“Although PSD2 can easily be considered a threat, at Nordea we choose to take a wider perspective. We believe PSD2 can provide opportunities to find new revenue streams and business models in which customers, partners and banks all benefit and can share new developments facilitated by Open Banking. We see an opportunity to also reduce cost for innovation and product development by teaming up. By teaming up with fast-moving fintechs we have already been able to create and verify product concepts in a shorter and more efficient development cycle.”
What changes will hit treasury and finance departments
When it comes to the benefits that may be felt by corporate treasuries and by finance departments, a lot is, as yet, unknown. “If I knew which products would come out, I wouldn’t be here. I would be running a fintech,” quipped a grinning Berger. “I still don’t know what will happen and therefore I can tell neither the consumers nor the corporates exactly what they will get. I can only tell them they will get it faster and it will probably be better than it was before.
“One of the biggest benefits will come from the expected increase in APIs. With powerful banking APIs, treasurers can move away from batch-oriented solutions to real-time information. As a result, corporate can make processes more efficient and increase data-driven decision making. Overall, treasurers stand to gain added value in terms of real-time data and improved data analytics. Over time, Open Banking will create new ways for banks to collaborate and be part of corporate value chains. Access to Account, part of PSD2, requires banks to provide a dedicated channel for third parties to access payment accounts, with the consent of customers. For customers, this means more freedom to choose a third party service provider as well as more personalised payments solutions.”
Should corporates be using Open APIs?
If banks embrace the opportunities delivered by Open APIs, they can remain relevant and offer improved and faster solutions to customers. But what about corporates themselves; should they be embracing Open APIs?
“APIs can be used in many ways, and it is up to each industry and/or corporate to decide about the necessity of an API strategy,” Berger opined. “It’s a big technological and cultural change on how to go from monolithic separate applications into an API architecture. But even if they don’t experiment with Open APIs, the demands from corporates will probably change and after a maturation period, corporate customers who experience the benefits of Open Banking will start to demand APIs from their banking partners elsewhere in the world. API platforms will serve as another distribution channel for bank services and these will be enriched by services created or enabled by collaborative third parties, who could be fintechs or corporate treasuries, for instance.”
Several voices have been raised around the idea of third parties accessing bank data, but Berger is relaxed about this scenario: “Several factors work to minimise the risk, most importantly explicit consent. Bank security is highly valued in the Nordics. That’s an upside when we are creating trust with our clients. And we need to nurture that trust by ensuring that our customers stay in control of their data, even when they choose to share it.”
Nordea already working with customers in Open Banking pilots
Nordea’s approach towards PSD2 has been proactive, with an Open Banking Developer Portal launched in spring 2017. Since then, there have been over a thousand developers experimenting with APIs within a sandbox environment, while in December 2017, some pilots have started working with actual live data. That means Nordea is now beginning a period in which selected third parties will build applications on top of the APIs and, together with pilot customers, they will confirm that all aspects of the Open Banking solution work as expected.
Nordea’s strategy behind embracing Open Banking ahead of PSD2’s arrival is explained by Sophia Wikander, Head of Business Innovation in Transaction Banking: “The biggest potential benefits for corporate customers may come from new value propositions, services and solutions that result from banks and new entrants partnering and combining their individual strengths. Banks have experience in compliance and regulation, strength in number of customers and they are reliable creatures of habit that can protect their vast amounts of customer information and data. Combine these with the agility and creativity of fintechs and you can really produce exciting, customer-satisfying results.”
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