PSD2 and the Role of Fintechs: Shifting the Payment Landscape in Europe
Discussions about PSD2 have ramped up the last couple of months as we inch closer and closer to the deadline. By January 13th 2018 the new directive will become applicable and by September 2019 all European countries have to align their national law with the new Regulatory Technical Standards (RTS) defined by the European Banking Authority (EBA). In this article we take a closer look as to how PSD2 is changing the payment landscape and the role of FinTechs in this evolving environment.
Where are we today?
With the new payment service directive, the European Commission set out to protect the customers by improving security, and lowering the barriers to entry in order to incentivize innovation and to encourage competition. To refresh, PSD2 consists of two new topics: Payment Initiation Services (PIS) and Account Information Services (AISP). The first allows customers to give merchants the mandate to make payments with their bank account. This way they bypass a lot of the traditional intermediaries. AIS allow third parties to access bank accounts and provide account aggregation services to the customers. The new directive opens up the payment and banking landscape to a lot of new players including FinTechs and giants like GAFA1.
The World Economic Forum conducted an extensive study on FinTechs as they set out to assess the disruption potential of these new players. Their findings paint a payment landscape under massive pressure and with a lot of uncertainties which is in line with the general consensus. It is clear we are migrating from cash to digital channels. As more and more online solutions arise, it is expected that, although not vanishing altogether, cash will further lose ground in the following years when compared to other means of payment. Mobile payments solutions are popping up everywhere as well, but adoption rate is not as high due to several factors. Firstly, in Europe and United States the payment market is being dominated by card-based solutions. If the mobile solution can’t offer a significant improvement to the web variant, most customers will not be interested to try out this new solution. Secondly, there is a negative loop to break through: the less vendor support for the new technology, the fewer customers will want to adopt it, which in return leads to even less support. Finally, many of the payment markets lack one consistent mobile payment standard. This is a major pain to customers who consequently never know which store accepts which mobile payment solution, hence adding more confusion to the customer experience.
The payment landscape in Europe is already looking much different than the US market due to PSD2. But, even between European countries there are differences in the payment landscapes. For example, the UK landscape might look very different from the rest of Europe because of Brexit. The UK will have to form its own Open Banking initiative and they are unsure at the moment whether they will adopt a EU- or USA-like model. Regional distinctions are forming between payment markets all over the world due to different local regulations. However regional distinction is also based on consumer behavior. Adoption differs from one country to another depending on whether there are already modern payment systems in place or not. The fact that a new technology is ubiquitous or not also greatly affects adoption. For example, we can already see a difference between Belgium and France where in most French stores the touch-and-pay model has been adopted while Belgium customers still prefer using the standard chip system. And finally, countries that embrace demonetization and drive innovation will see a much faster adoption rate than countries that don’t.
Positioning in the new landscape
Complying with the new payment service directive will be mandatory by 2018, but many of the traditional financial institutions remain unsure on how to respond to this new directive resulting in defensive, wait and see approaches. PwC interviewed 30 leading European bank executives and found that 68% feel they will be weakened as a result of the new directive and are concerned about losing control of their customer interfaces. Moreover, there are financial institutions that are not waiting around and are aligning their strategy to the new open banking landscape. Crédit Agricole has its own open source app store that provides a wide range of functionalities for their customers, major US banks launched Zelle to compete with Venmo on free payment transfers and Belfius launched an app to manage all your debit accounts across different banks.
As the landscape is evolving and new technologies start emerging, different types of FinTechs are forming. Some try to challenge the market on their own like N26 and Revolut. Both offer an extensive banking service through their mobile application. Others are more focused on a niche market, like for example Transferwise which specializes in transactional banking. However many (e.g. Payconiq, Onfido…) rather team up with traditional financial institutions than compete against them because of the harsh regulations and the challenge of acquiring customers. As pointed out by Etienne Ranwez, supervising senior consultant at Sia Partners, in a Special Edition of Point Banque on PSD2, FinTechs that want to remain completely independent will need to have deep pockets. Indeed, major investments will be needed, not only to build the target API modules and user-friendly products, but also in order to be compliant with the security standards imposed by the PSD2 RTS, in building and maintaining a client data base, and in compliance with the General Data Protection Regulation (GDPR).
Giants like GAFA have been gaining more and more influence in the banking and payment worlds. With Google Wallet, you can get a debit card, Amazon offers business loans to its top merchants and Facebook Messenger allows its users to send money to each other. GAFA is known for suffocating competition by buying a lot of startups and acquiring knowledge in all digital areas. They are also among the first to successfully use APIs2 to improve their business like for example Android and Apple Pay. The reason for investing so much in these strategies is a natural extension of these actors’ need to become increasingly relevant in consumers lives. They will play a big part in the landscape due to their size and expertise but especially because of the huge piles of consumer personal data they are sitting on.
What will determine success in the new OB World?
Are FinTechs emerging as significant actors? No one knows for sure. As regulation plays a significant role especially for the small actors, we will have to wait and see how these legislations will play out. One thing is certain, FinTechs will not have it easy. In their case size does truly matter. In order to thrive and become a significant actor in this fast-changing environment, one needs to offer something fresh, new and innovative that does not yet exist in the market. However, yet even more challenging is to acquire and maintain a solid client base. Small FinTechs will either have to team up with banks or cash out.
Banks and GAFA on the other hand have a clear competitive edge due to huge financial resources, customer base and various areas of expertise. They will also have more ease to adapt to the new regulations. Banks have the advantage that they can rely on their clients’ trust as well as decades of experience and knowledge. They know their clients and they know what they want. For them it will all depend on what partnerships they form and how they are going to drive the change to optimize customer experience. The GAFA might not have as much experience in the banking landscape but they have tremendous amount of client data and, just like banks…, cash! If they don’t want to leave money on the table, they can really disrupt the landscape.
The current state of the landscape makes it difficult to draw conclusions on how the FinTechs environment will look like in the coming years. The impacts and trends will become clearer in 2018. As for now the following remarks could be made. Uncertainty will remain due to regional differences in customer behavior and local regulations. Having fancy new technologies alone is not enough; establishing key partnerships are key to drive significant changes in the market. All actors need to have the flexibility to adapt to big changes in the landscape. As a result, only those with a strong anchor point in the market will survive. We are especially thinking of giants like GAFA. Competition will move away from the traditional payment activities to new areas like data monetization, fitting payment solutions to customer needs and providing agile technologies.
PwC. (2016, July). Catalyst or threat? The strategic implications of PSD2 for Europe's banks.
Telegraph, T. (2017, September). Exclusive interview with Starling Bank’s founder and CEO, Anne Boden.
World Economic Forum. (2017). Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services. N.A. : World Economic Forum LLC.
Point Banque - Special Edition. (November 2017). Fintechs still looking for their market position.
Copyright © 2017 Sia Partners . Reproduction totale ou partielle strictement interdite sur tout support sans autorisation préalable de Sia Partners.
1 Google, Apple, Facebook and Amazon
2 Application Programming Interfaces