The Moment of Truth

by: Berend Dinkla

Since the adoption of the Payment Service Directive (PSD) in 2007, there has been significant progress and integration of payments in the EU. While the current PSD aims for a legal framework to process transactions across Europe, the second Payment Service Directive (PSD 2) aims for more equality between banks and non-banking players in the payments markets.

PSD 2 aims to level the electronic payment playing field, reduce costs and increase competition. When this legislation is adopted, it will be a real moment of truth for banks. There are truly only two options: embrace the opportunities available to make the most of this radical change in the payment industry, or become a transaction-only institution that is nearly invisible to customers.

Banking in a changing time

On average, banking customers physically enter a brick-and-mortar bank office about once every two years. And they use their mobile apps to log into their bank twice per day. There’s no question that mobile payments are the direction in which we’re heading. And, with PSD2, aggregators will be able to collect banking data from multiple banks and offer customers a single interface for every payment and transaction they desire. Obviously, this comes with serious security risks.

Despite their demand for ease-of-use and mobile freedom, clients still want to remain well informed. They turn to their banks for advice and services, and yet will more than likely join the aggregator revolution when it comes along. Retail banks that don’t want to be reduced to simple transaction-only institutions will need to act fast and offer safe, secure, simple-to-use solutions.

Maintaining trust and loyalty

Studies show that, when it comes to data protection and finances, customers still trust banks the most. So, when PSD2 passes and Third-Party Providers (TPPs) are allowed to aggregate and manage customers’ banking data, retail banks risk losing the all-important customer relationships upon which that trust is built. What’s more, securing and protecting customer data can be taken out of our hands, and placed in the hands of unknown, and perhaps less diligent, TPPs.

Furthermore, TPPs will be able to offer incentives that cause customers to move their funds from one bank to another – even a bank in another country. If retail banks aren’t part of the solution, then real problems will likely occur. Banks risk losing their customers to foreign competitors. And customer data – which banks have worked so long to protect – may for the first time become insecure. TPPs will also take on the role of ‘financial advisor’, whether they have earned that title or not.

Searching for solutions

There is no question that retail banks will need to take action in order to not be left behind. To maintain client relationships and add value to client experiences, retail banks will need to adopt a business model that embraces the mobile payment trend.

But what is the correct option? Should retail banks develop their own aggregation platform? Should they partner with other banks to share the cross-sell and revenue opportunities the new service may provide? Can TPPs offer a solution that is secure enough to sustain our high standards? These are some of the questions currently being explored at ABN AMRO, with an eye on creating the highest level of value for our customers.

Impact only on retail banking?

Once PSD2 is implemented, e-commerce platforms could apply for a license in order to handle the payments for their customers. But even though the license requirements are not as strict as those for a bank, only the big e-commerce entities are probably able and willing to consider the instigation of a regulated entity. For the other e-commerce entities, the only option to handle the payments for their customers will be through cooperation with a bank or payments institutions. Therefore, the PSD2 directive could have an impact not only on the retail part of the bank, but also requires ABN AMRO to think about the merchant services offering for e-commerce platforms that do not have the appetite to instigate a regulated entity for handling payments of their customers.

Getting on board

PSD2 is coming. Within the next two years, our customers will begin sharing their personal financial data, log-in codes, payment activity and other private data with whichever TPP emerges as the most trustworthy. Any bank that does not want to be reduced to a transaction-only middleman is exploring every possible avenue to prevent that from happening. With our revenue model under pressure, we need to take action. By developing an effective strategy, finding ways to optimise our IT budgets, and constantly keeping our customers in mind, we will find a way to succeed in the PSD2 moment of truth.

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