How PSD2 will change the Banking Landscape: Part 2

How PSD2 will change the Banking Landscape: Part 2

In the last blog we highlighted what changes PSD2 will bring in the ever changing banking environment. We can easily conclude that it’s going to create an open field for innovation and improvements in existing systems but the adaptation rates can vary as regulators will be cautious in providing third party licenses.

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The banks, mostly traditionally ran are investing heavily to modernize themselves and compete or collaborate with the influx of FinTech’s all around the globe. In this blog post we will explore the potential business models or strategies the banks are looking at and the potential advantages that banks will have if they adopt these strategies.

In this PSD2 environment, the banks can decide their way forward depending upon their willingness and capability to adapt to this scenario. This could be in the following possible ways:

  1. Being more traditional and providing customer data to third party providers as a part of the PSD2 regulation. The banks wouldn’t need to innovate much or make major changes to their existing technology architecture but open up through APIs (Application Programming Interface) to collaborate with these external providers, who can act as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs).

    Even though the banks will not be innovating directly, they will be investing resources in API based communication with the Third Party providers as well as complying to the Regulatory Technical Standards to be released by European Banking Authority.

  2. The banks can decide to position themselves as AISPs and provide various services by creating their own mobile and web application suite. The consumers can get access to various customized services directly through the mobile applications developed by the banks. The banks can make the most of this situation as they already have a dedicated client base and hence a head start over the third party providers. They can create multiple additional revenue generation opportunities by cross selling various products and services through this model.

Apart from the above two aspects, the banks can opt to go completely online and collaborate with FinTechs providing various services to the users. It’s not a conventional approach, however, it can leverage the increasing online financial services market and availability of multiple customer channels. This type of collaboration can create opportunities for both banks and FinTech’s as they can leverage each other’s strengths to make the most of the online banking scenario and be market leaders.

In the recent past we have seen several financial services initiatives coming up in the market, symbolizing the need for banks to innovate in this environment. Some of the examples include BBVA and Credit Agricole1.

After looking at the potential models, we can focus on the main factors that will shape the landscape for banks and customers after the PSD2 implementation. These are highlighted in the diagram and the text below.
 

Analytics
As a part of PSD2 implementation, considerable amounts of user data will be made available, which can be advantageous since:

  • a 360 degree analysis of the consumer can be created2. This would be very useful for the banks to better understand their clients and create valuable customer insights.
  • with the same data, predictive analysis can also be done and various patterns can be created. The banks can then provide relevant services and create offerings for their clients.
  • these analytics can be used for discovering commercial opportunities, performing enhanced risk management, creating comprehensive credit risk scorecards and automating various decision making processes like loan application approval.

Pricing
As per a survey conducted by KPMG, 61% of respondents believe that next generations will switch banks as easily as they switch their energy or telecom provider3.
The pricing strategies by the banks can have two types of effects:

  • Due to transparency introduced by PSD2, the switching costs for the customers will reduce. This can lead to the banks losing out on a lot of customers.
  • The decreased switching costs will give customers better options to choose between banks as well as decreased costs for accessing various financial services provided by banks.

This means that banks would need to maintain competitive prices for their offerings so as to retain customers.

Infrastructure
To adapt to any of the business models the banks will have to invest heavily in resources both for technology upgrades and compliance purposes. The banks might not be able to recover all these costs in a conventional manner and will have to provide value added services for additional revenues.

Banks as Third Party
Direct Access - Focusing on their direct access to the retail client base, the banks can themselves via an interface act as a third party payment service provider. Not all banks will gain from this but it could be advantageous for many others.

To summarize, we can see that introduction of PSD2 will create advantages for customers and both challenges and opportunities for the banks. But in order to benefit from PSD2, banks will have to invest heavily and test potential strategies to differentiate themselves from their peers. In the next post of this series we will highlight XS2A, share some examples from the market and also highlight the steps taken by FinTech’s to make the most of PSD2.

Read How PSD2 changes the banking landscape; part 1.

 

Authors: Martijn Berghuijs, senior manager KPMG The Netherlands and 
Shashank Batra, senior consultant KPMG The Netherlands

 

1 Data Sharing and Open Data for Banks Report: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/382273/141202_API_Report_FINAL.PDF
2 https://home.kpmg.com/xx/en/home/insights/2015/10/rethinking-customer-engagement-strategy.html
3 Next Generation Banking Survey, KPMG. October, 2015



 

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