Following our previous blog on PSD2 XS2A implications for banks, in this blog we will share four strategic options for banks to react to PSD2 XS2A thereby shaping the future of banking. The PSD2 should not be treated as a mere operational and compliance exercise by financial institutions. The provisions on XS2A should be considered accelerators for technology driven innovation impacting banks’ (future) customer relevance and ownership.
Innovative third party providers (TPPs), including FinTech, Big Tech, but also incumbents such as acquirers, processors, payment service providers and innovative banks, are seeking to capitalize on this opportunity. All these players threaten to capture revenues long taken for granted by traditional, incumbent financial institutions and banks in particular.
The main message of our previous blog was: “For a bank to effectively operate amongst FinTech challengers, it should know exactly what it wants to be to its customers”. Underlying this are two key strategic choices:
1. What should my positioning be in the payments value chain? Banks either focus solely on providing account access and let others offer compelling payment and account information services to (their!) customers. Alternatively, banks develop these new applications themselves and compete directly for customer relevance and ownership in the TPP domain
2. What should the breadth of my transaction services portfolio be? Banks either offer a limited portfolio of payment and information services (through APIs conform XS2A requirements) or extend to also cater for other types of transactions ‘beyond payments’, e.g. advanced payment and information services, digital identity services and API based lending and risk management services
These two essential choices result in four strategic options for banks as depicted in figure 1.
Figure 1: Four generic strategic options for banks resulting from PSD2 XS2A
Option 1: Comply
‘Minimal’ action is required by banks in the Comply option. The bank focuses on PSD2 compliance and ‘opens up’ through APIs (conform XS2A requirements) to the most limited extent possible to enable TPPs to execute payment initiation and account information services.
Option 2: Expand
The Expand option also ensures PSD2 compliance, while banks also focus on developing and exposing services (through APIs) that go beyond basic payment and account information services. Banks will be put in a position to seize new revenue stream opportunities by monetizing APIs beyond the services compelled by PSD2. API based services leveraging account information and digital identity are interesting areas to explore, providing potential new revenue sources for banks.
Option 3: Compete
The Compete option is similar to the Comply option. However, banks also add an offensive strategy by offering (basic) payment initiation and account information services, leveraging the reach to other banks they will obtain by becoming a TPP themselves.
Option 4: Transform
The Transform option combines all three other options: banks focus on pursuing a ‘bank as a platform’ strategy to enable third parties to build applications and services around the financial institution. This must be based on open APIs. Banks become complete digital players, competing and collaborating for customer relevance and ownership.
In summary, PSD2 XS2A is reforming the existing payments business and banking executives should become very much aware of the way they are being challenged. However, truly understanding the implications of such change is difficult as many underlying strategic questions are still unanswered. Banking leaders should focus on adequate and timely decision-making regarding the bank’s future strategic value chain position and product portfolio. The future of banking starts today!
About Vincent Jansen
Vincent Jansen (1974) is Principal at Innopay. He is a passionate collaborative innovator and has extensive experience creating networked products in complex, multi-stakeholder environments. Since 2003 he is active in the field of online payments, since 2008 in digital identity. He has contributed as a consultant and an architect to the creation of payment products like iDEAL (NL) and MyBank (EU) and digital identity products like eHerkenning and Idensys (NL government) and iDIN (NL banks). Vincent is part of Innopay’s management team and heads the payments practice.
About Mounaim Cortet
Mounaim Cortet is a senior strategy consultant at Innopay, working on strategic and innovation challenges in payments and digital identity. He supports business executives to develop new insights that enable them to (re-)define their business (model) and operational strategy to compete in the digital era. He was the project manager and lead-author for the Payments working group of Shopping2020, and he is currently involved as expert consultant and facilitator of the Open Transaction Alliance (OTA), i.e. a cross industry initiative working on the strategic implications of PSD2 ‘access to account’ (XS2A).
About Innopay
Innopay is an independent consulting company, specialised in online payments, digital identity and e-business. We help our clients, including financial institutions, governments and corporates, to develop the compelling strategies and digital services for consumers and companies that are key for successful competition in a rapidly digitising world.
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