Post-PSD2: What Will Banking Look Like?
The revised Payment Services Directive (PSD2) has been the cause of much hand-wringing in the banking space, with incumbents foreseeing a future when the new banking giants are Starling, Tandem, Monzo and Atom, rather than HSBC, Lloyds, Barclays and NatWest. Granted, PSD2 will change the way UK consumers bank, but the true picture may not be as clear-cut, or as immediate.
So what does the future look like? What lies beyond PSD2?
We’re already beginning to see some of the unintended consequences of regulating banking technology, such as handset operators becoming disproportionately powerful in payments because of their monopoly access to trusted execution environments and secure elements.
The EU will likely clamp down on this once they realise that Google will probably chase for bank statement data or if serious breaches occur that damage consumer confidence. It’s likely that FX will become much more important in a nominal PSD3 – more transparent cross-border transactions will become the norm once APIs become more ubiquitous and easier. Then it’s only a short step to FX API access between other continents.
If we do get a PSD3, then banks that have only done the minimum to comply with PSD2 will then have to start their compliance cycles all over again. It’s genuinely easier to use PSD2 now as a future-proofing exercise and invest the time and effort properly.
Looking at the increasing number of technology focused regulations and directives that have come out recently from the EU, like eIDAS or GDPR, the EU is not likely to cease regulatory momentum any time soon.
Banks need to realize that this is not a one-time deal or that things will settle down after PSD2, or that market technology will suddenly stop progressing outside of their walls.
What can fintech teach us?
Data is vital, and repeatable machine processing is essential to cost reduction and massive volume growth. This is how fintech firms have seemingly developed such a large market share so quickly, expanded into other territories at breakneck speeds and eaten whole other industries that couldn’t catch up after first contact.
American banks in Europe are lucky as they are learning how this works, seeing the value and the market being made, without yet having any direct regulation. We’re going to see practices of open APIs and data sharing spread to the US because of that and hopefully without the delay that EMV or Faster Payments has experienced in crossing the Atlantic.
Also, banks in Japan have been proactive in tracking this kind of regulation and forming coalitions between government and business for better solutions for years now. The Japanese central bank is looking into domestic ACH on blockchain, that’s not happening just through regulation, but through the market players choosing to engage.
Interactions with the EU market as well as trading with Europe will involve an API relationship almost immediately after 2018.
Moreover, the American and Japanese authorities have wisely chosen to include blockchain solutions in their horizon planning – unfortunately, the EU has been a little too early with their legislation, before blockchain solutions started to properly mature, so I would expect blockchain and crypto-currencies to be embraced by PSD3. Beyond that, global blockchain inter-operability standards may be up next.
In the end, the bigger banks will win out over some smaller banks because of existing trust. Challenger banks will be the first to market with value added services, because they’re naturally more agile.
They will likely be first in with better APIs, better UX, and better choices to create richer experiences. The bigger banks are already copying this, and will probably acquire smaller banks and fintech challengers to bolster these capabilities. As for Google, Amazon, et al, who knows – maybe we’ll all be banking via Facebook in 2020.