Insight: How big banks can overcome the challenges of PSD2

Emmanuel Methivier,
04 Jul 2022

Compliance with PSD2 is the latest key milestone in the continued evolution of Open Banking. It’s a new set of rules that changes how we confirm our identity when making purchases online.

As such, it represents a key milestone in the continued evolution of Open Banking to improve customer authentication processes.

The implementation of Strong Customer Authentication (SCA), for instance, requires merchants and payment service providers (PSPs) to work together with technology suppliers, card schemes and many others, to deliver SCA in a way which works well for customers.

For both traditional and challenger banks, a major question, therefore, is how can they turn a regulatory burden into an opportunity to compete, innovate and grow? To answer this question, it’s important to consider PSD2 in more detail.

What you need to know

PSD2 is the EU Directive that paved the way for Open Banking and is a follow-up to PSD, the payment services directive that arose from SEPA, the EU’s Unified Payments Authority, whose mission was to unify payments across the EU.

PSD2 is, in many ways, the aim that was originally set out in PSD – it lays out what the EU wanted the financial sector to accomplish in order to empower consumers and unite the financial ecosystem so that all stakeholders could simply and securely communicate with one another.

While it gave financial institutions a set of goals to accomplish, one of the difficulties was that it never specified a solution, let alone one based on APIs. It wasn’t until the industry started trying to tackle the problem that APIs became obvious as the way to proceed.

Open Banking standards, which are based on APIs, were the answer to how to comply with PSD2 regulations.

The law is also notable because it highlighted an industry-wide digital gap. Tourism, transportation, manufacturing and other businesses, for example, were quick to digitise and work in tandem with customers’ digital lives. Consumers of banking and financial services, on the other hand, still needed to visit branches in person to complete documentation for items such as loans and mortgages.

It also states that consumers have a right to access their data, something that not all Open Banking initiatives have done. The legislation established for the first time that some categories of data (such as financial) belonged to the user who created it.

This generated a series of heated disputes among European politicians about what it means to own your data and what rights individuals have to it, particularly in terms of using it to create profit and moving it around – a concept known as ‘portability’.

A new perspective

Behind the legal and procedural technicalities, the most significant challenge is that Open Banking necessitates a change in mentality.

Traditionally, most banks assumed that each customer’s banking and financial requirements could be met by their organisation. Many would stay as much as possible in that bank’s ecosystem, and competition would be centred on wallet share or product-per-customer targets.

The difficulty with this strategy is that it’s based on the assumption that each bank can provide the best products to fulfil all of an individual’s specialised financial services needs. However, in today’s digital societies, where different consumer requirements mean it’s just not practicable for a single institution to give all a customer might ever desire or need, this is increasingly at odds.

This is where a change in approach is required so that banks can operate in a diversified and thriving financial services ecosystem. Part of this entails collaborating with consumers to help them live their digital lives, ensuring that financial services are always available and fully integrated into an embedded finance system.

Closing the gap

Banks must also consider themselves as technology firms and financial platform providers in order to close this gap.

Implementing an API-first method, for example, allows systems to communicate with one another and provide an effective interface between diverse software components and, most importantly, developers. As a result, the developer experience must be considered to ensure that each API is simple to use, comprehend, and incorporate into their own code as part of an efficient development process.

These are crucial considerations because Open Banking represents a future in which customers recognise that their data has value and that they have the freedom to move it around in ways that are visible, secure, and enforceable.

While banks will continue to play a critical role in encouraging innovation their approach will determine how quickly their consumers benefit.

Written by Emmanuel Méthivier, catalyst, business program director at Axway