Your customers are ready for PSD2
PSD2 has a broad scope of intentions, from opening up the market to new types of organisations, to defining common interoperability standards. But more than anything, PSD2 is about the customer. The directive answers a shift in our digital economy that is well underway, as European customers are already high adopters of companies that are poised to enter the PSD2 landscape.
A PricewaterhouseCoopers Strategy study shows that 88% of people surveyed use third-party providers for online payments, revealing a large and anticipatory cohort of customers who are primed for progressive digital banking. In this study, 85% of respondents rated the security of these alternative payment services as “high” or “very high.” Third party payments have already earned customer trust.
Banks are adapting to this call for customer-centricity, seeking ways to expand their current offerings. These are the same banks that have lost revenue and wallet shares to nimble and disruptive fintech companies that have already “figured out” user experience. Beyond losses in payments revenues, an Accenture report stated that banks will also see losses in their interest-based revenue streams, because “the displacement of bank-customer interactions’ erodes “customer ownership.”
PSD2 will only accelerate the disruption already in motion by directing banks to open their APIs to third parties. The banks that are able to recapture some of their projected lost revenue will be the ones that meet PSD2 as an opportunity rather than as a threat. By adding third party capabilities to their core businesses via APIs, banks can develop and measure new customer strategies quicker, drive down innovation costs, improve cross-selling, and leverage customer insights to upgrade products and services.
However, as new products and services enter the market, so do new risks. Shown in this blueprint for a payments authentication workflow, the addition of third parties creates more layers in the payments verification process, which means a new focus on the authenticity of users, businesses, and providers.
Since banks opening their infrastructure will face more vulnerabilities, PSD2 is bringing strong authentication to the forefront. Banks that fail to authenticate transactions effectively will be held liable for breaches. However, payments verification after PSD2 implementation has an unprecedented combination of challenges.
One challenge is that, under PSD2, customers can interact with third parties, which significantly decreases the amount of customer data available to banks. An open banking study from Accenture estimated that it will take two years to regenerate business rules for detecting fraud under this new PSD2 view. Thus, banks will need a powerful risk engine that can navigate these unknowns. The technological differentiator for accurate and seamless authentication will depend on the ability to ingest siloed data inputs and bridge knowledge gaps in order to produce customer intelligence at scale. At the same time, banks cannot afford to “over-friction” their discerning customers with onerous authentication requests.
Are you PSD2-ready?
As 2018 approaches, banks becoming PSD2-ready are defining sets of decisions and implementation goals. Among the questions to have in mind:
How will you use transactional risk analysis?
How will you implement a transaction monitoring mechanism for real-time transaction monitoring? How will you report your fraud rates out to the regulator?
What authentication technologies will you deploy? How will you onboard the customer onto these technologies?
Whats your API strategy? Will you actively try to recruit third-party providers? Will you become a third-party provider yourself?
Do you have the right project team in place?
Are you looking at other regulations and creating a unified strategy to satisfy them?
On the road to finding a solution
Banks facing this combination of challenges will have the option of collaborating with different vendors. Feedzai is capable of addressing every major PSD2 pain point in one platform, resolving risk mitigation, customer intelligence, and strong authentication.
For instance, banks will need to develop customer intelligence across the full product portfolio, and leverage data enrichers for improved detection. Feedzai can ingest siloed, data-agnostic inputs and transform them into insights with an omnidata and omnichannel view, so the organisation can build collective intelligence, even under the constraints of the new PSD2 view.
To meet the evolving nature of fraud proactively, without manual coding, banks will also need a risk strategy that can account for unknown types of fraud. Feedzai has a hybrid approach that combines rules and machine learning for self-learning models that improve your detection even for new and unknown fraud.
The challenge will be to adapt to new risks and scale as transaction volume increases. Feedzai drives operational efficiency with dashboards and reports that give banks the insights they need to monitor their unique KPIs, resulting in better fraud prevention decisions.
Artificial intelligence is the strongest tool for navigating the great unknowns that PSD2 will introduce. With machine learning, organisations have a unified strategy for risk on one hand, and experience on the other hand. PSD2 is as much a customer directive as it is a compliance directive. If you are a bank, this is your chance to woo your customers all over again.
About Nuno Sebastiao
Nuno is a co-founder and CEO of Feedzai, an agile machine learning platform for risk management. Previously, Nuno led the development of the European Space Agency Satellite Simulation Infrastructure, contributing to the Rosetta space probe. Today, Nuno and his team of top data scientists and experts in payments technology are working to achieve a singular mission: make commerce safe.
About Feedzai
Feedzai is coding the future of our digital economy with the most advanced risk management platform there is, powered by big data and artificial intelligence. Some of the world’s largest organisations use Feedzai’s machine learning technology to manage the risk associated with banking and shopping, whether it’s in person, online, or via mobile devices.
For more insights into the nascent landscape of Open Banking in Europe, please check our Open Banking and APIs Report.
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