Risks and Benefits
- Open Banking API for third-party entry will avoid current practices where bank account operators are often provided with automated machines.
- Increased security, the bank having control over data movement.
- The bank may offer third parties its own solution, including high-level, toll-charged features.
- Third parties will be subject to standard regulation and registered, reducing the scope for unfair practices and increasing the transparency of the banking sector and services.
- The communication barrier caused by the beacon along the client-bank route.
- The threat of loss of customer loyalty and greater customer fluctuation between banking institutions.
- Loss of opportunity to reach the client with additional services because the third party is built between the bank and the client.
- The third party itself may offer its own competitive offer to clients.
- Third-party transactions mean new risks for clients and banks. A real possibility exists that banks will be exposed to higher risks for lower yields.
- In the event of a third party’s failure, the bank will be exposed to bulk complaints and lose credibility.
- IT costs for introducing and modifying processes and additional servicing and development.
PSD2 represents one of the biggest interventions of European legislators in payment services.
New players devise innovative products and technological upgrades at such a rate that institutionalized organizations can hardly keep up. Accelerating this development is the progressive enhancement of digital and online technologies that change the financial services and banking environment. Despite these changes, financial services are still fragmented under many institutions and clients have no easy way of tracking all their financial products in one place. For example, an application where the client has an overview of all his accounts or loans, can easily manage them, and can get comprehensive advice on the complete portfolio of his financial products.
This may soon change. Under European Union legislation, all Member States must implement a newly revised Payments Directive (PSD2, 2015/2366 / EU) into their national legislation. The need for a new regulatory directive is based on the necessity to regulate the payment market and the need to unify the fragmented European regulatory framework resulting from the implementation of different regulations under individual EU Member States. PSD2 thus represents one of the biggest interventions of European legislators in payment services. The new PSD2 Directive aims to create a single, integrated market for payment services with regulatory standards for banks and emerging payment service providers.
PSD2 defines clear rules to help strengthen payment security, enable new payment services, and provide a transparent and healthy marketplace to benefit consumers. All financial institutions providing online access to a payment account will also be under obligation to open this access to third parties if they are duly registered and the client gives consent. This approach can be used by third parties to initiate payments or to aggregate account information. The PSD2 therefore introduces the possibility for online banking users to enter payment orders or track their account statements through authorized third-party applications (PISP and AISP).
European banking institutions has to do a strategic decision that will fundamentally affect their continued existence for at least the next decade.
The standard service becomes multi-bank, where all banks can be serviced via any other
bank. Whether this solution is offered by a traditional or completely foreign bank is not so important. European banking institutions are thus at a critical point where they will have to make a strategic decision that will fundamentally affect their continued existence for at least the next decade. At this crossroads, they must decide whether to become a banking entity supporting other third-party providers, or a traditional bank providing comprehensive banking services to compete with these third parties and maintain direct contact with their clients.
With digitalisation, financial institutions and banks will have to increase their emphasis on the quality and development of their virtual products and data protection strategies. The security of online enviroment will become a key aspect influencing the company brand, a comparative market advantage and to the company’s overall benefit. PSD2 is a challenge, but it also brings huge potential for developing client products and services, with segments and dimensions that we cannot yet imagine. It is up to each bank and financial institution to deal with this and whether it will provide results and profit from it.