While most of the buzz around the updated EU Payments Services Directive has centred on benefits to retail customers, its role in ushering in open banking will create new opportunities in transaction banking. Joy Macknight reports. 

Liz Oakes

The second Payment Services Directive (PSD2) is a game-changer for the European banking industry. Although much of the focus to date has been on the retail, the directive will also have a disruptive impact on transaction banking.

The profound change it will bring about might not seem apparent at first glance, particularly compared with its forerunner. The PSD1, established in 2007, created the single market for payments and harmonised payments processing in the European Economic Area, including execution time and fees. This basic framework remains unchanged under PSD2.

The second iteration of the directive, which member states must transpose into local law by January 2018, extends the geographical scope of the original to include ‘one leg out’ payments, applicable where at least one participant is based in the EU. It also mandates, in most cases, strong two-factor authentication to bolster customer security.

Most importantly, PSD2 obliges banks to open up their customer account interfaces to new third-party providers (TPPs), with the aim of fostering innovation and competition in the payments space. According to the European Payments Council, TPPs will have access to consumers’ payment account to make payments on their behalf and provide an overview of their various payments accounts.

A new era of banking

The way this is being implemented – through application programming interfaces (APIs) – has the potential to radically alter how banks manufacture and deliver services and products. Together with other initiatives, such as the UK’s Open Banking (which also comes into effect at the beginning of next year), the PSD2 heralds a new era of banking.

To clarify, the directive does not mandate the use of APIs; however, the industry views APIs as the best technical solution for PSD2 compliance. As Christian Schaefer, head of payments, corporate cash management at Deutsche Bank, says: “The regulation foresees two options for providing access [to TPPs]. The first is a dedicated interface, such as an API.

“The second option is direct access; effectively the bank’s existing online channel, which requires significant alteration to be PSD2 compliant.” Most banks have chosen to use a dedicated interface, he adds.

“The PSD2’s success as a driver of innovation is linked to banks’ adoption of APIs and investing in dedicated, versus direct, access,” says Mr Schaefer. “Importantly, regulators must set the right incentives in international transposition, as well as develop appropriate RTS [regulatory technical standards], to ensure that banks provide and develop APIs.”

Developing an API standard will also promote uptake, according to Christian Fraedrich, product manager, treasury payments and euro clearing, institutional cash management, at Deutsche Bank. Several organisations are working towards a common standard, such as the Berlin Group, a pan-European payments interoperability standards and harmonisation initiative.

“When it comes to the adoption of APIs, the more banks and countries that join the Berlin Group and implement standardised APIs across Europe the more successful it will be going forward,” says Mr Fraedrich.

Building an ecosystem

While many banks have been using APIs internally for a number of years, very few have made the leap and opened up access to external developers and partners. In response to a recent Aite Group survey, 81% of banks said they have used APIs for connecting internal systems for two years or more, but only 14% had given external access to their systems via APIs. But the trend is clear: 21% reported that they had developed open APIs in the past year and 52% indicated they are planning to do so within the next two years.

In its 2016 report, ‘Understanding the business relevance of open APIs and open banking for banks’, the Euro Banking Association identified the potential risks for banks in this new environment, including disintermediation, as well as general reputation and compliance risks. But it also says open APIs and open banking could “pave the way to enhanced innovation and customer relevance, industrial partnerships with the larger ecosystem of fintech market participants”.

Ismail Chaib, chief operating officer at Tesobe and the Open Bank Project, a Berlin-based fintech start-up that provides open APIs to financial institutions (FIs), believes open banking will bring a form of democratisation to the banking industry.

“Banks can move from one-to-one, specific partnerships to a larger network of partners. They will benefit from more innovation and new propositions emerging that wouldn’t have otherwise,” he says. For example, the Open Bank Project has a global community of more than 6500 developers that use its 130 banking APIs to build fintech applications, he adds.

If banks “do PSD2 right” then the banks, their customers and software developers will all benefit, says Steve Kirsch, CEO of open banking platform Token. “PSD2 enables software companies such as Token to come in and write software that works across all banks. We can act as the grease on the wheels to make payments faster, at a lower cost, more secure, and with less reconciliation effort required because of higher straight-through processing rates and additional associated information,” he adds.

Disintermediation worries

But disintermediation remains a top concern for many banks. Both Mr Kirsch and Mr Schaefer emphasise that, while open access makes it easier for new players to enter the market, banks can also act as TPPs and create unique applications that meet their customers’ needs – and in the process, disintermediate other banks, adds Mr Kirsch.

Mr Fraedrich argues that banks are, in fact, in a better position than fintechs under PSD2 because TPPs need to be licensed to provide services. “Banks already have the licence to act as a TPP vis-à-vis corporate and retail customers, bringing together account information or acting on behalf of clients – and they also have multiple relationships with other banks as PISPs [payment initiation service providers],” he says.

According to Ben Robinson, chief strategy officer at banking software vendor Temenos, fast-moving transaction banks could use PSD2 to establish the principle relationship with their corporate clients. “This presents an opportunity for one bank to aggregate the corporate’s bank accounts – and become a PISP as well. In that way, the bank could provide a cockpit through which a treasury department could do interbank pooling, for example, because the former can initiate payment on behalf of that customer in all their different banking accounts,” he says.

“In addition, as an aggregator, the bank could provide value-added analytics across customers’ accounts, payments and transactions,” he adds. He foresees a scenario where banks could subsume the in-house treasury team.

Banking as a service

Enrico Camerinelli, Aite Group’s senior analyst and author of the ‘Corporate banking API strategies’ report, sees PSD2 as a trigger for banks to look at what it means to be client-centric in a corporate context. “If a bank is forced to provide open access to its retail client accounts, then why not consider doing the same for its corporate clients?” he asks.

He anticipates that in the next two years, banks will move from narrowly focusing on payment-centric APIs to a wider corporate transaction banking-based API plan. He says some banks with robust and efficient back-office systems for cash management, trade finance and other basic treasury functions are now exploring giving access to these functionalities to the corporate user through open APIs.

“If a small or mid-sized corporate doesn’t have the budget to spend on a treasury management system, for example, but needs basic cash forecasting or foreign exchange transaction management, then it could use what the bank uses for its own internal business through open APIs,” he says, adding that small FIs could also leverage the functionality of a large transaction bank.

Liz Oakes, expert associate partner at McKinsey, agrees this is a future trend. She believes one of the first capabilities that should be made available is the type of cash management that has largely been reserved for large corporates and multi-national corporations. This includes netting, pooling, sweeping, cross-currency account facilities, access to better information on the status of payments, invoice presentment and payment – “things that actually help them with working capital solutions and supply chain finance”, she says.

Real-time potential

In combination with PSD2 and open banking, Ms Oakes believes that instant payments, which will see a global upsurge as the EU, the US and Australia come online with their platforms later this year, will amplify the shift in corporate customer expectations that has already occurred on the retail side.

She says: “The potential is enormous when greater access to information, whether linked to fintech or more widely to the Internet of Things, robotics and advanced analytics, enables payment initiation. Couple this with immediate access to funds and the ability to initiate transactions instantaneously, and a powerful set of capabilities is now possible.”


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