In the prior parts of this article, I considered the background to PSD2 – especially the desire to provide alternatives to the current domination of mainstream banks in the payments system. I also noted the single critical change: open APIs to be used by third parties to provide payment and information services. So far I have focussed on the changes in competition to mainstream banks that the regulations will bring about – however not all the new players in the dance will be in direct competition with existing banks.
Some of the most important service providers will be those technology companies providing account aggregation, visualisation and transaction front-ends. Residing on your smartphone or computer, these applications will allow customers to view many more aspects of their financial position in one place and send instructions to manage a host of products and services from insurance to savings, and from pensions to mortgages. At present, most on-line management applications offered by banks are limited to a bank’s own services and products; as we discussed earlier – banks have traditionally seen non-lending services as a way of binding customers to the bank rather than simply as money-making exercises. So the independent customer application will be a critical enabling tool, allowing users to manage accounts and services from a large number of suppliers.
The front-end technology may be provided by the PISPs referred to earlier or by third-parties, linking into one or more PISP’s payments systems. The winners in this area are likely to be the PISP/Technology partners who provide the widest range of links to services (banking, investment, insurance, credit, loans, pensions, etc.) as well as providing an easy route to product vendors (cars, houses, travel, etc.), together with top quality applications. The challenge for existing large banks will be to judge for how long they can maintain their banking/payments business models as it exists today and how soon they will need to create their own, open architecture, front-ends where they can at least have a presence at the ‘financial-buffet’ offered to the customer.
The PISPs themselves will seek to link to as many customers and service/product providers as possible and may therefore tend towards oligarchy. It is unreasonable to think that customers will find advantage in using a myriad of providers of payments services which (as we pointed out earlier) are mostly hidden from end-users. Most retail customers will likely settle on a single provider (retaining a bank debit card as a backup payment mechanism). In some cases, vendors may establish their own PISPs – in the same way that, in the past, certain large shops (Harrods, for example) offered their own credit card for use in their store only. This will surely be the case with entities like Amazon, which will be a PISP, a Vendor (in its own right) and a shop window for other vendors’ products.
Before returning to my theme of who will dominate the new post-PSD2 landscape, I need to cover two more types of player: one a newcomer and the other perhaps the oldest in the industry. First let us consider the CISP: customer information service provider. For some time the value of payments information has been recognised by banks, and there already exist large data processing companies that monitor customer spending, create profiles, sell lists to marketing operations and run customer loyalty schemes. These entities, currently tied to individual banks or groups of traditional banks, will be able to register as CISPs and by gathering more information, from more sources, be able to offer a significantly enhanced service. There is however an open question about from where they will source their information? Traditional payment banks will, for the foreseeable future, still be carrying the majority of payments traffic between customers and vendors, so PISPs will need to establish, or continue relationships with these banks. But transactions made from banks via PISPs will be less rich in data – as the PISP, not the bank, is being instructed by the customer. CISPs will therefore need to gather data from PISPs as well as banks. If they are successful in this (and again I see this as an oligarchical business – with only perhaps five of six major CISPs dominating), the richness of their information about all aspects of customers’ financial situations, spending, assets, preferences, etc. will be extremely valuable, to the point that it is hard to see a major retailer embarking on a marketing program without purchasing such data.
The second market participant I turn to is what I will call a ‘financial service product provider’. Clumsy I know, but this is the best I can do to provide a catch-all term for Savings and Loans, building societies, insurance companies, credit card companies, challenger banks, pension providers, investment advisors, wealth managers, stockbrokers, etc.; the list is indeed long. I believe that it is this group that has the most to gain and the most to lose with the coming of PSD2. What holds these entities together as a discrete class is that, while they provide financial products and in some cases are regulated as banks, they do not derive the majority of their income from traditional geared bank lending. These entities are in the product business: whether the products are schemes for retirement saving, car loans or funding packages to buy houses. Any of these companies that have yet to do so must make a decision on their method of operation under PSD2 rules. If I may use an analogy these are businesses which are located in the high street of the town – but more and more of their target customers are going to be shopping in the out-of-town mall (the electronic marketplace, served by PISPs). Do you relocate to the mall? Maintain a dual presence? Or remain in you traditional location? Furthermore, the new mall requires you to pay a fee: its operators and the customers in the mall require products to offered, managed and paid for in a particular way using their favourite applications. Perhaps the decision to move is an easy one – but the decision to modify the way your customers consume products today is much more difficult. For example, if you are a wealth manager and are used to telephone calls and face-to-face meetings as a way of signing up and managing clients, how will this fit into the PISP/application world where your product needs to be presented to PISP users electronically, be amenable to comparison with competitors, and include sign-up and management procedures that can be conducted wholly electronically? In the new PSD2 world the winners will be those that can demonstrate the benefits of their product simply and effect sign-up almost instantaneously (including credit checking, accounts, legal status etc.) The PISPs are likely to play a major role in this – obviating the need for customers to repeatedly enter basic information, as that information can be held by the PISP. Switching accounts, buying insurance, changing investments, should eventually be available as a ‘button-click’ on the customers’ smartphone application. The amount of work necessary for many of these financial service product providers will be immense, and clearly many will decide to wait and see what happens. However for those that do grasp the opportunity offered by PSD2 to integrate their product delivery with the new financial architecture, there could be expansion opportunities vastly greater than those they envisage today – as the number of PISP customers can only rise.
In conclusion I would like to turn back to where we started: the traditional banks. These banks have a particular problem: in the wake of the financial crisis of 2007/8 many have restructured, separating the elements that were deemed risky like investment banking, from the traditional customer banking and lending business. As we have seen, PSD2 will bring new costs and reduced income to the traditional banking business, but much more important than this, the ties that bind traditional banks to their customers will be weakened. With their new PISP and their front-end applications, the customers will be able to make payments without going through their bank – but that is the least of the bank’s worries. The customers will also be able to switch their mortgages to a competitor, put their savings into a higher-rate account with a Challenger Bank, open special purpose accounts and invest in stocks and shares, without their own bank ever knowing anything about this. So having built walls between traditional and investment banking, many large banks now face a future where the fundamentals of that traditional banking look increasingly weak.
The response of the large banks to this challenge is, at present, one of the great questions concerning PSD2. Most banks will likely wait and see what happens, then some will fall back into a utility posture – where the bank is simply a place where deposits are held and from which loans are made – directly or via other players in the post PSD2 world. Other banks may endeavour to embrace the new world of banking and build their own multi-faceted emporium of product, advice, payments and lending – utilising their own and third-party applications and information as conduits to their clients. However while this image sounds attractive, the changes necessary for a large bank to adopt such a posture would be enormous and I find it difficult to see how this can be operationalized quickly. Smaller, more nimble service providers, without the baggage of the mega-banks’ existing large businesses, IT and payrolls, may well be at a significant advantage. In this case look out for a round of acquisitions of the more nimble by the more ponderous: Giants never learn to dance – they have children: they dance!