Rethinking banking, players, and business models - The PSD2 paradigm shift explained

Mathieu Barthélémy, Worldline: In a few years, Open Banking has the potential to disrupt many more industries and ultimately provide consumers with integrated, cross-industries experiences covering end-to-end customer journeys

In a post-PSD2 era, any player of the financial industry may seek opportunities to reap the benefits of Open Banking in order to deliver a unique, compelling value proposition, while generating additional revenue streams. Institutions that turn the new challenges and requirements to their advantage will be the ones able to capitalise on the tremendous business opportunities opening up with their APIs.

Swinging between regulation and innovation

The Open Banking movement has spread across Europe as a result of the adoption of the Revised Directive on Payment Service (PSD2), effective since January 2018. This systemic and far-reaching change in the banking industry gained traction thanks to three main factors:

• The adoption of new regulations aiming at promoting innovation (PSD2) and consumer protection (GDPR); 
• The fierce (and rising) competition, especially since the rise of fintechs and neo-banks – which have already onboarded millions of users and continue to attract new ones thanks to their innovative and customer-centric approaches; 
• The evolution of end users’ needs, who expect even more from banks, starting with real-time and tailored digital services.

Even though many challenges still have to be answered, we should see an acceleration of the Open Banking movement worldwide in the following years, as several banks have already started to experiment with the opening of further APIs (beyond the regulatory scope) related to non-payment accounts, bank data and products, customer data etc.

The era of ultra- and inter-connectivity

Broadly speaking, Open Banking can be seen through the spectrum of three main challenges. First of all, interfaces (aka APIs) must be  Open Banking Report 2019 standardised as much as possible to allow seamless interactions between banks and third party providers (TPPs). Additionally, the security of the overall ecosystem must be a priority, by converging on the Strong Customer Authentication approach and putting in place efficient fraud mechanisms. Finally, all actors should manage enquiries and resolve disputes in a consistent way. These deep changes require banks to leverage their own resources, and to combine them with assets delivered by third party providers.

In this context, ultra-connectivity is a key topic and banks therefore have to develop the APIfication of their systems, following three possible approaches to create new revenue streams:

• Act as a ‘Distributor’ by opening legacy services/products in a ‘Bank as a Service’ model;  
• Act as an ‘Aggregator’ by enriching traditional products with services delivered by third party providers; 
• Act as an ‘Orchestrator’ by delivering augmented (owned and external) services that cover end-to-end customer journeys – and ultimately build customer relationship.

As platform models are not an obvious fit for all financial institutions, it is crucial for them to develop their digital expertise and master API lifecycle management (from API design to TPPs’ support and invoicing). They can notably start by leveraging their legacy services thanks to digital platforms to reinvent their businesses beyond basic transactional services.

Third party providers… and beneficiaries?

This ultra- (and inter-) connectivity also seems greatly beneficial for TPPs which can take this opportunity to develop their own businesses, either by consuming APIs opened by financial institutions or by teaming up with them to deliver a compelling value proposition.

However, the fragmentation of the APIs opened by financial institutions requires significant effort from TPPs to address all of them. Several standardisation initiatives suggest a potential convergence of standards within Europe (Berlin Group, Open Banking UK, STET etc.), but the multiplicity of frameworks issued does not currently constitute a simplification for TPPs – and the threat of fragmentation is even higher at the global scale.  

One of the objectives of the Open Banking movement is also to bring more transparency, protection, and security to end-users, and ultimately give them back the control of their data. To earn their trust, TPPs will undoubtedly have to prove themselves – despite the proven value of their solutions – and be exemplary regarding the management of end users’ consent and data while perfectly handling security issues and fraud dispute.

Mind the customer experience gap

‘Open Banking’ is partly born as an answer to the changing customer preferences, brought on by the digitalisation of all industries. With more than 5 billion people owning a mobile device today (still counting), connected consumers are increasingly engaging with digital services and now expect to access a wide range of those services in every domain: education, health, retail… and, of course, finance.  

In a few years, Open Banking has the potential to disrupt many more industries and ultimately provide consumers with integrated, cross-industries experiences covering end-to-end customer journeys. From that moment on, financial products will be seamlessly (but transparently) integrated into the overall experience – only when they add a real value for the end-user.

Purchasing a good, such as a car, will become much smoother through the ability to easily supplement the (one) contract with all the necessary services (maintenance, insurance etc.) as well as to choose between various financing options from a plethora of providers, like loan subscription, crowd lending etc, available directly from the merchant website.

For SMEs and corporations, and as a treasurer, the nightmare of managing tens of accounts in several banks and currencies would thus disappear thanks to the capability to access aggregated financial insights, making it easier to work on capital optimisation.

The interview was first published in the Open Banking Report 2019, which offers insightful editorials, interviews and expert analyses that paint an exhaustive picture of the Open Banking regulatory shifts and the important extents in which this impact the industry.

About Mathieu Barthélémy

About Worldline

 Capitalising on a strong PSD2 expertise, Worldline can support banks of all sizes to explore any envisioned Open Banking strategy thanks to its Digital Banking Platform. Designed to process several billions of API calls per month, it notably comes with a comprehensive TPP community support suite and a flexible monetisation engine.