PSD2 is the second Payment Services Directive from the European Union. It will have a major impact on banks as it will remove the control they hold over customer data, allowing customers to use third-party service providers to access their accounts using open application programme interfaces (APIs).
This legislation will transform the arena that banks currently compete in, turning it into an expansive battlefield with all of the financial services are brought into the mix. These changes will heighten the expectations of the customer, as they will have a wide array of new approaches to banking to choose from.
Faced with this changing environment, banks must prepare to be agile enough to keep up with the expectations of its customers, as new third-party providers bring the latest cutting edge technologies into the mix.
CBR spoke to Pieter van Heck, Manager EMEA, at Dynatrace, about the position banks are in facing PSD2, and how they must think and act to stay relevant once the changes go live early next year.
He said: “PSD2 is coming out now in January 2018, we all think it will definitely change the way banks are going to be working. For banks, from their point of view it is a matter of how do I keep up relationships with my customers? Secondly, have I thought about new business models to interact with my customers? Thirdly, how am I going to make sure that those APIs I open up will give my customers a good experience? Banks will now have not only their own customers to worry about, but also all third parties also taking advantage of existing environments,” said Mr Heck.
The scale of the changes coming in on the back of PSD2 has been compared to those sparked by the arrival of the internet, a complete alteration in the way processes are carried out. While this poses a challenge to banks, we must remember that they have had to face change before.
“If you take a look at banks today, they have gone through a couple of evolutions in the past. Traditional banks still have a lot of legacy running on the mainframe, and what we also see is they have gone through changes already because we started having the internet banking, and we now have more mobile banking. So we do see that banks already have to open up their systems.”
Banks cannot outrun their legacy systems, to keep moving and working they must ensure that the wheels keeping turning on the traditional features and offerings, while also empowering their new innovative schemes to take on innumerable nimble opponents.
“We have now talked about the legacy applications in the back end, but of course, this is also the case for people who are going to build services on top of that one. One of the advantages that they have is they do not have to think about legacy, and they can say that they can make sure that the content provided to customers takes into account the newest technologies. Those newest technologies are now coming in over cloud deployment, and what we are actually talking about are microservices. What this actually means is instead of creating one gigantic logic, you are going to divide up that logic into those microservices.”
In summing up microservices, they are a set of modular services that can be deployed independently, each running its own process geared toward the development of software. These small, separate services provide a powerful approach, and they are also able to communicate.
“Those microservices will take care of a certain request you have to do, the advantage of that is that it creates flexibility, because it allows you to speed up these microservices really quickly, or shut them down when they are not needed. It also means you can scale them across the platform, giving you sustainability,” Mr Heck said.
While banks are set to be facing the biggest challenge, no one is yet aware of what effects the changes will entail in full, meaning that all involved will have to tread carefully.
“What we would suggest to both existing banks and the new service providers is to make sure to take into account or that they use this new scalability and elasticity that is being given by the new technologies like microservices, and really take advantage of them. With every advantage there is a bit of a disadvantage.”
“The key thing is that they have to change, they definitely have to change, and that is because of the risk of losing the customer. They do need to put quite a lot of investment in taking a look at these new technologies and making sure that they take advantage of them. So yes, banks need to do that, but they also need to be a little bit careful about how much they are going to offer, you do not want to throw your key jewels just out on the street like that.”
With a new layer of complexity coming to the handling of finances, security would presumably be a central talking point, we took the opportunity to ask Mr Heck what his understanding of this situation was in light of PSD2.
“In general, what we have seen so far is the European Banking Authority mainly focussing on describing the security standard, so it really is one of the key points they are concerned about. If we then look at the level of details they have provided, then again it becomes quite faint, so they are trying to put security placements in place for how people authenticate. They have also come up with a new regulation on keeping a register of what is happening to those services.”
The bottom line is that the change is coming with PSD2, and banks will have to simply ride the wave, come what may. While numerous challenges await the traditional banks, standing out among the attractive new entrants into the space may be the greatest, and it is likely to require collaboration.
“What a bank wants to avoid is just becoming a commodity, we see banks like for instance, Nordea, that have already presented an API, and are actively looking for partners to build additional services for their customers, the better relationships will be where fintechs and banks start working together to build the newest set of customer services to the customers of both the fintechs and the banks, working hand in hand. I think that will probably be the best situation.”