With more than 25 years of experience, V.S. Raj is Head of Banking and Financial Services at Syntel, responsible for the strategic direction and operations of the Company’s largest industry group. Here he tells Lawyer Monthly readers everything you need to know about the newly brushed up Payments Services Directive (PSD2) rules.
With the revised PSD2 on the horizon, banking institutions are increasingly eager to take action to get ahead of this new regulation and the storm of industry disruption it may cause.
The new rules are to be implemented at the beginning of next year and constitute a significant change in the way payments services are offered to customers. PSD2 has been designed to inject competition into the market by enabling new types of payment services, increased security and consumer protection.
By requiring banks to allow access to their customers by opening up their Application Programming Interfaces (APIs), non-bank entities will be entitled to offer payment services. This change will have the effect of democratising the market and giving consumers greater choice in who they choose to provide them with payments services.
The competitors are technology companies such as Google and Amazon who have a wealth of experience in digitally engaging with customers. They are far more agile than large banks, whose digital offerings can be overshadowed by the feature-rich applications developed by technology firms. The challenge that banks face is to avoid becoming the ‘custodians’ of customer data for new providers to exploit.
To avoid this pitfall, banks should look to collaborate with FinTech companies who are increasingly nibbling away at the corners of the traditional banking business model. By choosing to collaborate rather than compete, banks can stay at the forefront of the market and benefit from the innovations that FinTech firms offer. Banks can use this more open environment to their advantage by bringing third parties on board to adopt new services and open up new income streams to offset the risks created by PSD2.
For example, an experienced bank with existing money transfer and payments infrastructure may invest more time and effort in developing their cross-border payment offering. Smaller regional banks may wish to cultivate stronger customer connections, using their physical presence in local markets entities to offer a unique selling point that FinTech firms cannot replicate.
Another strategy is simply to improve service levels for their current offerings. The vast majority of banks offer online services, but clicking a button in a mobile app does not inherently make an experience ‘digital.’ For example, even though a loan application may have been submitted online, waiting 10 days or more for approval can make the experience feel distinctly ‘old tech’ and contradict consumer expectations. A truly digital service occurs when all parts of a bank’s infrastructure are brought up to date and operating at digital speed.
In my work at Syntel, this is one of the issues that we face frequently when working with traditional banks. We have found that most often, the path to success is to focus on evolving the core banking systems to modernize them so they can stay ahead in this journey.
One of the biggest challenges posed by PSD2 is how to incorporate the additional security measures required to safeguard sensitive customer data while allowing third-parties to provide payment services. Right or wrong, tech firms are already trusted by customers to keep their data secure, as evidenced by the massive numbers of people that have entrusted Facebook and Amazon with their personal details.
The key for banks will be to ensure they do not open themselves up to the possibility of large-scale data breaches with a poorly executed PSD2 implementation. A multi-layered cybersecurity approach is critical to provide airtight APIs and maintain the trust of their customer base.
In order to capitalise on PSD2 and fight off Fintech competitors, traditional banks’ mobile solutions also need to add new functionality and increase penetration among their customer base. The next generation of consumers has a strong appetite for digital and speed, meaning that banks must offer the same range of digital solutions available from technology-only companies.
This appetite is perhaps greatest in the 20–30 age bracket. Because these consumers grew up in a connected world, they have less loyalty to individual banks and are less reliant on personal relationships with their local banker. For the time being, switching providers is a great pain point for consumers and few can be bothered to make the switch for small gains. However, PSD2 will make switching service providers easier, meaning it represents both a risk and an opportunity for the banking world.
To succeed in this new environment, collaboration is the key. PSD2 offers a wealth of challenges and opportunity, and to secure a bright future, banks should expand their horizons, look to offer an innovative array of new products, and learn from new partners who come to the industry with a fresh pair of eyes.
