PSD2 defines a government licensing authority which mitigates some risk for participants, although just how effectively that license actually protects banks from 3rd party risk and liability has yet to be tested. In the US, given existing 3rd party management requirements, banks own any and all risk.
This article describes several different approaches a bank might consider when evaluating opportunities made available under PSD2. A bank might consider becoming a distributor, making 3rd party services available to account holders, a producer that delivers new services to other banks, or an aggregator that confederates multiple 3rd party suppliers.
“These are some of the directions offered in the second report in a series of papers from the global financial services industry association Mobey Forum‘s Open Banking Expert Group.
The report suggested some financial institutions may choose to take a straight compliance approach to EU’s Revised Payment Service Directive and retain their existing role. There are opportunities, though, to explore new approaches. Financial institutions can choose roles as distributors, leveraging third-party services to enhance their product portfolio. They can also be producers and develop their own services to be distributed by third-parties, extending the reach of their core products. Financial institutions can also leverage and capitalize on easier access to data by becoming information aggregators or providers.
By clearly identifying potential roles and providing concrete examples of successful implementations, financial institutions can better understand the options available and the approaches they can pursue, enabling them to get ahead in the new API banking economy.
“Under open banking, assuming customers have given their consent, banks are required to give third parties access to their customers’ account information and to allow third parties to initiate payments from their customers’ accounts. This total upheaval of the financial services industry calls for strategic action from banks,” the study suggested.
In the banking-as-usual model financial institutions do not necessarily have to change their role: they can continue banking as usual – producing and distributing their own products. However, not doing anything should be a conscious strategic decision, the study maintained. It added the competitive landscape around financial institutions changed with third parties now being able to target financial service customers with new products and services. “Without a strategic plan for the new landscape, this position is not likely to be a winner.”
Currently, most financial institutions said that they are open to collaboration with third parties, but many are concerned about risks and the effects of open banking.
In considering a new strategy, financial institutions can take on the role as producer, offering its own products through third-party channels; or distributor, offering third party products on its own channels, an app store type of platform, or both, as these two roles do not exclude each other.”
The article goes on to review the pros and cons of these models and is worth reading if considering how to respond to Europe’s PSD2 initiatives or Fintech in general – but remember to take risk into account!
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group