The 2018 Payment Services Directive (PSD2) opens up payments markets to new, radical service providers in an aim to create a cheaper, more efficient European payments market. It provides new opportunities for third parties to access banks’ internal data in real-time to improve customer service.
Other financial regulations introduced recently have been focused primarily on transparency and financial oversight and as such have been seen primarily as an operational overhead with little business benefit. PSD2 is different in that it offers wide-ranging practical business impact. Most of the media attention has concentrated on the retail market but there are significant ramifications for corporate banking relationships as well. It requires banks to open their payments infrastructure and customer account records to third parties. These providers of financial services can operate across the EU as long as they are licensed by a single domestic financial authority. Banks on the other hand still need bank licenses in each country they are operating in. Furthermore many of the new players are focusing on specific market needs such as cross-border payments with less encumbrance from legacy systems or heavy compliance rules.
Banks are required to provide an open mechanisms to support the regulation. These are technically referred to as application programming interfaces (API’s). These effectively sit as an additional layer between a bank’s central datastore and third party payment and account service providers (PISP’s and AISP’s). Over time, instead of relying on back-end infrastructure, the new API layer could be enabled to carry out the majority of the processing before committing the final instructions to existing systems. This will be a more flexible and less disruptive approach than attempting to restructure core banking systems. It should also ensure more discrete solutions for addressing the associated demands around latency, security and customer experience.
So is it all bad news for banks?
Not at all. There are a number of more far-reaching advantages for corporates that banks can deliver based on the strong relationships and proven security forged over many years.
1. Multi-Account Cash forecasting
Currently corporates rely on various channels to receive their account information – most of which are only provided overnight. PSD2 enables treasurers to receive multi-bank account information in real-time. Provided systems in place are capable of creating accurate, real-time positions and projections then intra-day liquidity can be managed with far greater certainty.
2. Significant Savings on Forex
As well as providing technical API’s, PSD2 offers opportunities to review business models. For low-value payments, a rate card will probably be enough but for higher value payments a streamed price, backed up with sales desk support, will help get the flow and make sure that the FX exposure can be managed efficiently by treasury teams.
3. Enhanced FX Risk Controls
Corporate treasurers are accustomed to rely on their banks’ advice for hedging their FX risk. Banks are increasingly turning to multi-currency virtual bank accounts to augment their services in this area as it allows their customers to manage all currencies from a single location. With consolidated bank accounts in place, made easier by PSD2, treasurers can manage their FX positions with less reliance on swapping or hedging transactions.
4. Reduced Risk of Internal and External Fraud
Open banking are changing the rules for fraud prevention, just as the threats from cyber security become even greater. Banks have spent years directly acquiring a wealth of knowledge around their customers’ payment behavior and have used this to monitor for possible fraud with as little impact on them as possible. This competitive advantage does not have to be given up, even if customers no longer need to log into their banking websites directly to effect a transaction.
Providing an equally secure infrastructure to PISP’s (Payment Initiation Service Provider) will undoubtedly be a challenge for banks and they are entitled to block third party access if they can justify that such activity is potentially fraudulent. To safeguard their customers’ interests, banks must make sure that they continue to extract as much intelligence as possibly can from activity initiated by PISP’s. With the current advances in AI and machine learning there is no reason why, even with open banking, the value of a bank’s understanding of its customers cannot at least match what they have today.
5. Enhanced Intra-company Control
Treasury services have long been impaired by the difficulties of complex company hierarchical models. PSD2 enables the use of virtual accounts which in turn can be used to determine regional cash positions. Surplus funds, once identified, can be reallocated to provide a low-cost source of funds.
6. Real-time analytics
Analysing customer activity across multiple accounts can provide valuable insight and help spot trends over time. When this is augmented with external data then the view is even more powerful. So armed a bank can more confidently propose new products and services to customers.
So, in conclusion, when it comes to looking for the benefits of the Open Banking innovation in B2B finance, banks should not be looking for a minimal tactical approach as with so many other recent financial regulations but rather take a strategic, bullish stance. PSD2? Me 2!