Disrupting payment ecosystem

The revised Payment Service Directive (PSD2) is shaking things up in the payments ecosystem. Banks are at a crossroads and faced with threats and opportunities. How they react will signify their potential for growth in the future.

It’s no secret that the payments space is undergoing a major transformation. As more devices become connected, financial inclusion becomes a priority, and regulations evolve to reflect the changing landscape, Fintechs have a substantial opportunity to shake up the payments game.

This force of disruption has had a substantial impact on traditional financial institutions (FIs), which have long held the title of gatekeeper for financial products and services. Fintechs are now circumventing the “gate” and finding new ways to provide superior customer service, products, and services. Over 98% of enterprise leaders say APIs are critical to their digital transformation efforts.

The current state reflects just that: the ability of Fintech to work around FIs in providing innovative financial solutions to people of all different demographic backgrounds. However, the future looks more like a team play—an unbreakable foundation of FIs and fintech working together to break new ground in the payments space.

Rumblings of Disruption

This disruption of open API payments by forward-thinking Fintech is not new. However, the support of regulatory and oversight entities in pursuing innovation is. In the EU, the Payment Service Directive (PSD2) is already making waves with its mandate that FIs open their APIs to third parties. This revised directive positions the customer as the ultimate beneficiary, yet Fintech and FIs alike have a significant opportunity to help drive positive changes to the financial services industry.

Payments have begun the shift from a commoditized entity to a more strategic element that can add real value to end customers. The key question is whether or not FIs will be active participants and drivers in this power shift or whether they will sideline themselves as passive utilities in the payments ecosystem.

Open APIs Signal a Shift in Roles

FIs have long held the role of core customer service providers, but that may be changing. As the PSD2 mandates opening banks’ APIs in the EU (a shift that will likely be reflected in other parts of the globe), the role of banks will shift. How it shifts is largely in the banks’ hands.

Banks are at a crossroads, and the future is unclear. With open payments API, banks can fall into one of two new roles: an infrastructure on which Fintech can rely and capitalize or a critical, everyday component of customers’ financial experiences. With the latter, banks have an opportunity to grow revenue streams through expanded reach.

To more clearly understand how this shift is taking place, it can be helpful to look at precisely how PSD2 is impacting the payments ecosystem. Key tenets include:

  • New, PSD2-regulated services will be offered as third-party payment initiation, supported by access to customer accounts through open APIs
    ➢    Third-party payment initiation will be offered by payment initiation service providers (PISPs)
    ➢    Third parties can access and extract a customer’s transaction history, balances, and other account information data through account information service providers (AISPs).
  • Third parties will be able to initiate online payments to E-commerce merchants from a payer’s bank account through PISPs via an online portal
  • PSD2 poses a threat to banks in the form of loss of fees related to card-based transactions. It also represents a potential loss of customer ownership.

How Banks Can Evolve Alongside Disruption

Banks must think strategically in order to survive and grow in the face of this disruption. There are concrete threats but also opportunities for banks who are able to look beyond temporary disadvantages. First and foremost, banks need to remain compliant with PSD2 to decrease the impact of disintermediation, including loss of volume.

Banks must also innovate, including finding ways to monetize access. The mandate is for banks to open API payments, but this should not limit banks from stopping there. There is an opportunity for banks to offer direct debit mandates and to facilitate the completion of product applications through APIs for a fee. Not only does this open up new revenue streams, but it enables banks a seat at the table of collaboration with Fintech and third parties looking to create new products and services.

Another opportunity for monetization lies in the ability to offer customer insight-driven services. As customer-centric entities, banks can provide digital portals in partnership with third-party providers that offer value-added services benefiting the entire ecosystem. Strategic partnerships with third-party providers are going to be a key consideration and factor in banks’ success moving forward. Consolidation of services and data can cut costs and provide incremental value to customers—and subsequently increase revenue for both the providers and banks.

Closing Note

Owing to the major evolution in the payments ecosystem, Fintech has taken up the lead role in the payment game. As a result, banks have also become innovative in finding ways to monetize their access. If you are looking for ways to make the most out of the payment ecosystem, get in touch with our experts.

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