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Expert opinion

PSD2 and Open Banking shapes the future of banking

Thursday 4 January 2018 | 11:02 AM CET

Anupam Majumdar and Paul Weiss from Accenture explain how PSD2 and Open Banking will reshape everyone’s experience with financial services

This editorial was first published in our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017. The guide features several important thought leadership editorials and explores the evolving world of transaction banking, B2B payments, supply chain finance and e-invoicing market.

Open Banking will reshape everyone’s experience with financial service. Banks may benefit from Open Banking – through an API-enabled approach – as this paves the way to enhanced innovation and customer relevance, industrial partnerships with the larger ecosystem of fintech market participants, movement towards real-time payments and, last but not least, compliance with the upcoming Payment Services Directive (PSD2).

Advanced technology and new functionalities in B2B payments will turn directory marketplaces into transactional marketplaces, solidify the terms of the contract and carry out the transaction, all through the online platform.

PSD2 – the game changer in the banking industry

European banks are at a critical juncture in their history. The revised PSD2 is driving European banks to a defining moment forcing them to make a key strategic decision: whether to become a banking ‘utility’ supporting other providers’ customer-facing solutions, or an ‘Everyday Bank’ playing a central role in customers’ daily lives. At the core of PSD2 is the requirement for banks to provide APIs for granting Third Party Providers (TPPs) access to a customer’s online account/payment services while also enhancing the security of internet payments and account access. For consumers, this means providing consent to their banks to use their bank details, initiate payments or use data for marketing purposes. For corporates, PSD2 will drive increased competition, innovation and transparency across the corporate payments value chain and also introduce increased multi-bank account aggregation services.

Open and Instant: delivering real-time payments

One of the most fundamental changes required by the advent of immediate payments is a shift of service mindset for banks. To retain and win customers in the future, banks must migrate their entire mind-set towards immediate delivery both of payments and other banking-related offerings. Real-time payments will carry significance for corporates as it brings down their DSO value and provides real-time overview of their payables as well as receivables positions. What’s more, the impact of real-time payments should not be looked at in isolation. Open API banking – pushed by PSD2, growth of e/m-commerce in EU and smartphone, internet penetration – will provide a big thrust to the uptake of the real-time payments in the market.

For banks, this means exposing their systems, including payments, to the outside world through APIs that developers of third-party applications can embed wherever needed. By giving access to their APIs to others, banks should not risk disintermediation. In fact, the opposite is true. It allows banks to extend their services and their brand outside the banking environment and into the digital ecosystem for extensive use. This requires banks to enter partnerships to provide a user-driven experience through APIs. By giving developers their APIs, banks can keep pace with consumer demand.

Banking as a platform: the new normal

To orchestrate the open banking ecosystem that simplifies customers’ lives and offers services of unprecedented diversity and value, current execution models must change. Consumers expect nearly all of their transactions to be on par with the service they receive from GAFA (Google, Amazon, Facebook and Apple) companies, which poses a challenge for banks in particular. Banks need to create branches that provide an advanced digital experience combined with convenient locations, while also developing an online digital experience that can compete head on with the tech giants.

Banking as a platform is the key theme that banks would want to invest in on the backdrop of PSD2. For transaction banks, this allows them to serve partner banks and corporates separately and higher up the supply-finance value chains. Transaction banks might be keen to offer value-added services even remotely to corporate customers not served today.

Thus, the combined impact of the revised Payments Services Directive, real-time payments and APIs will be profound and pervasive. Accenture Research predicts a 20-40% risk of loss in revenues for corporate banks if no action is taken. Doing nothing is not an option. Soon, corporate banks will take a ‘three-fold strategy’ to protect their revenues and differentiate themselves:

1. Innovation play – Deutsche Bank’s Autobahn project (corporate banking open APIs to offer markets trading) and Citi’s publication of selective API uses cases in corporate banking are cases in point which proves the emergence of open innovation in corporate banking as a theme to track in 2018. A natural step would be to create a repository of open banking APIs (core and value added), power a developer portal to publish these and create developer communities to foster innovation;

2. Relationship play – Corporate banks would pro-actively pursue a strategy of building new collaboration models with fintechs and third party providers (including ERP providers, accounting package providers), explore possibilities of offering bank’s core services on these platforms and create new revenue sharing possibilities;

3. Evolution play – A few market leading corporate banks (typically first movers) would explore offering ‘beyond banking’ services to their corporate clients (and to customers of these corporate clients). This will though require development of an active partnership strategy with players offering maximum synergies.

PSD2 and other Open Banking initiatives will disrupt the traditional vertically integrated banking model. Thus, the challenge for European banks is to recognise both the threat and the opportunity in these changes. The poorly prepared will only see it as an existential threat to their consumer payments business. In sum, the banking industry will change dramatically over the coming months and years, with Open Banking at the core of this reform.

About the authors

Anupam Majumdar and Paul Weiss work within Accenture’s Consulting Practice, Financial Services, based out of the Netherlands. Both have worked with multinationals to define their business and technology strategy and then playing a role executing and delivering against that strategy.

 

About Accenture

Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Accenture has extensive experience in payments, Everyday Banking, open APIs and digital banking strategies – and can help organisations to navigate the optimal route along this journey.

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