How to make money from PSD2

The final compromise text for the EU Payment Services Directive 2 (PSD2) has now been published and is unlikely to change substantially when passed as legislation, probably in September this year. Some significant details are still hazy, but the thrust of the legislation is now clear, so banks need to start planning their strategy to address the requirements.

Unlike many regulatory initiatives, PSD2 does not simply require additional controls and reporting requirements. Its ‘access to account’ (XS2A) provisions legislate fundamental changes to the structure of the payments industry. By and large banks do not seem to have realised this quickly enough, perhaps seeing it as ‘just technology’, so have failed to engage constructively with the legislative process. As a result several of the provisions are likely to be unpalatable to the banking community.

The key change is the regulation of Third Party Payment Service Providers (TPPs). Banks may have hoped that the legislation would protect them against the likes of Sofort AG, Trustly and PPRO, but it has actually consolidated their position and obliged banks to provide services to them.

Articles 57a – 59 describe three types of TPP:

• A ‘funds checking’ third party can request the account-holding institution (bank) to confirm whether sufficient funds are available in the user’s account to cover a card payment initiated by the third party. This is aimed at decoupled debit card issuers.
• A ‘payment initiating’ third party can instruct the account-holding institution (bank) to send a payment from the user’s account. The payment must be processed with the same service level as if the user had initiated the payment directly.
• An ‘account information’ third party can request information about the user’s account, which the account-holding institution (bank) must provide. (The legislation does not spell out exactly what information needs to be made available).

In all cases the service must be authorised by the user of the account, but does notrequire a contractual relationship between the bank and the TPP – the service must be provided to all duly authorised third parties without discrimination. And as Hamlet said, there’s the rub - no contractual relationship means that banks can’t charge the TPPs for provision of these services. Nor can banks charge the account holder, because the legislation forbids discrimination in terms of timing, priority or charges for TPP-initiated transactions compared with transactions directly initiated by the account holder.

At first sight this looks like a dead loss for banks – they will incur capital and operating costs to offer these services to TPPs with no offsetting revenue stream. Undoubtedly some banks will treat it this way, grumble about yet another regulatory burden, and take the costs on the chin.

Other banks do not believe the picture is so bleak. They see a number of opportunities to derive revenue from this. Some of the ideas being floated include:

• Treat the services offered to TPPs as just a small subset of the APIs that banks will have to develop to survive in the digital age. Monetization of these APIs is at the heart of the bank’s digital strategy. In fact, banks like BBVA would argue that digital is the bank’s strategy.
• Provide the bare minimum services required for compliance for free, but offer richer services on a chargeable basis. For example, account balance information is provided for free, but transaction history information is chargeable.
• “If you can’t beat ‘em, join ‘em”. Nothing prevents banks from setting up as TPPs in their own right and competing head-to-head with the new kids on the block. It’s also an opportunity to win market share from competing banks.
• Partnership with TPPs. Some of the TPPs realise that a value chain in which a key participant derives pain but no gain is unsustainable in the long run, and are offering incentives to banks to promote their services.

Are these strategies credible? Are the new business models sufficiently robust to keep banks in the payments game? Or is the introduction of another hungry mouth to feed in an already low margin value chain going to add costs that will ultimately spell the end of “free” consumer banking?

Icon Solutions are hosting a breakfast roundtable to discuss these issues. If you’d like to understand the issues in more depth and join the debate with banks and TPPs, please register here.