PSD2 has been expected for quite a while and the revised directive has been attracting a lot of attention and debate. Thus, it has been discussed over the last years and the potential purpose, regulations and scope of a revised directive has been subject to speculations. PSD2 will fundamentally change banking as we know it, and as of today there are still a great deal of uncertainty regarding the implementation, regulations and the consequences. The intention of this chapter is therefore to outline what PSD2 is and thereby clarify why there is so much hype and excitement surrounding the directive.
Both PSD1 and PSD2 emphasize opening up the market to new types of organization and market participants, as well as defining common standards that encourage interoperability (Boden, 2015). As with PSD1, the scope of the directive is payment systems. It is therefore useful to clarify what can be acknowledged as a payment service within the scope of the directive. In this matter, a payment service includes electronic services offered to consumers and businesses mainly to handling payments and get an overview of their own finances (FinansNorge, 2018). As outlined in chapter 3.1.1, PSD1 comprise electronic payments and non-cash payments. The intention of PSD2 is to widen the scope of the regulatory framework of PSD1 to cover new services, players and additional geographies and currencies. Thus, the revised directive probably has significantly more relevance for consumers (FinansNorge, 2018).
The aim of the directive is to provide the legal foundation to secure further development of a more integrated internal market for electronic financial payments services across Europe (European Commission, 2017). PSD2 introduce comprehensive rules for payment services and includes account emerging and innovative payment services. The directive introduces regulations of (European Commission, 2017):
● Strict security requirements for electronic payments and the protection of consumers´ financial data;
● The transparency of conditions and information requirements for payment services;
● The rights and obligations of users and providers of payment services PSD1 created a solid foundation for a legal framework, but the commission identified loopholes that needed to be fixed to enhance customer protection and improve transparency (SEPA for Corporates, 2017). After the implementation of PSD2 consumers are enabled to make transactions in any currencies across the borders of Europe. This also includes reducing entry barriers for new payment service providers and thereby accelerate the digital
competition and digital disruption within the industry.
PSD1 opened for other players than banks to offer payment services, but the directive did not define the exact types of payment services these new market participants potentially could provide. This made the legislation ineffective and created the need for a revised directive.
Thus, the big difference between PSD1 and PSD2 is that the revised directive does not exclusively regulate the banks and their payment services. It also regulates other payment service providers and the services they can provide based on the customer information in the banks´ account systems (FinansNorge, 2018). This introduces a new type of market
participants, the Third-Party Payments Providers (TPPs).
With the implementation of PSD2, the 18 month implementation period from January 2018 will involve compelling changes for the personal customer market in banking operations.
Until now, banks have basically possessed monopoly on customer account information and payment services but with the implementation of the new directive this will cease. Banks have to give other payment service providers access to customer data through open APIs. This means that banks must share their information safely with all licensed companies that are interested in making use of it. This will enable TPPs to build their financial services on top of the banks existing data and infrastructure. This implies that TPPs can develop and provide their services more rapidly and innovative than banks are able to do today. This in turn will fundamentally change the value chain within payment services (FinansNorge, 2018). As of today, the banks follows a product strategy, but with the digital development and
implementation of PSD2 the banks are pushed toward a platform strategy to utilize the potential value creation created in the new digital ecosystem (Hernæs, 2018).
This implies that the directive will cause ripple effects and have consequences for both authorities, banks, TPPs and bank consumers all over Europe. PSD2 is driving new
technologies and innovations and thereby tries to meet the changing trends that comes with digitalization. In line with the technological development banking has advanced from
traditional branch banking to online banking and now mobile banking. PSD2 invites non-bank players to the banking market and enables them to provide a full spectrum of financial
services if they fulfill the legal requirements. This constitutes what has been known as the
“FinTech Revolution” (PwC, 2014). It is a technology-driven innovation and forces traditional banks to keep up with the rate of change.
In addition to the increased competition banks are also facing considerable financial
challenges, mainly due to the expected reduce in income and increase of IT costs due to new safety requirements and the opening of APIs. With open interface the risk for potential fraud increase and the banks have to invest to improve and prepare their systems for the new digital competition (Hærnes, 2018).
Furthermore, financial services should be less formal, more personalized and easier accessible for consumers (Evry, 2016). A competitive advantage for the banks has until now been their unique and loyal relationship with customers . However, the consumers are slowly getting comfortable with using non-banks for financial purposes, for example, PayPal has existed for over 15 years and has gained high confidence in consumers.
Banks have to become more proactive and innovative to face the new and increasing competition. However, this is challenging because banks have a lot of legacy and it is not natural for them to be innovative at such fast pace. PSD2 do not care about legacy, rather it is all about being first, best and fastest. The question is therefore how the banks should approach innovation internally. It is not given that banks have the necessary qualities needed to be innovative. While TPPs such as start-ups and Fintech companies can release products and services on a try/fail culture, banks do not have the same opportunity. Banks are characterized by lot of legacy and dependency and they do not have the capabilities needed to develop and release services as fast as for example app-developers. They have too much to lose and big projects evolves to projects that are too big to fail (Netlight, 2018). The process is costly, takes too long time, there is a lot of prestige and they do not want to release anything until the product of service is 100% ready. The risk is that the innovation gets killed in the process (Netlight, 2018).
Historically, well established actors like banks have triumphed in the battles of sustaining innovations, while entrants have triumphed when disruptive innovations have emerged
(Christensen, 2006). A disruptive innovation is characterized by its focus on different features of the product than the features most valued by the current mainstream customer (Christensen, 1997). TPPs are expected to rethink financial payments services through open APIs and develop innovative services that will disrupt the payment services industry. The difference between sustaining and disruptive innovations is how the innovation evolves a product. A sustaining innovation can be described as evolutionary and a disruptive innovation as
revolutionary (Christensen and Overdorf, 2000). The implementation of PSD2 will introduce disruptive innovations through open APIs to the payments service market and both new markets participants and the banks may potentially gain from this. While a sustaining innovation improves the performance of a product in ways that are valuable to existing
customers, a disruptive innovation creates an entirely new market (Christensen and Overdorf, 2000).
PSD2 provides great uncertainties and challenges, but the directive also provides compelling opportunities for banks to redefine their business and operating models to create new value and revenue streams through development of innovative customer services. The banks possess several competitive advantages, which in a resource-based view is caused by distinctive processes shaped by the firm’s assets and the path they have adopted or inherited (Teece et.
al, 1997). The definition indicates that the advantage is in the combination of the banks’
competencies and resources, because this combination is hard to imitate (O’Reilly and
Tushman, 2008). In other words, banks competitive advantages are not the core competencies or the enormous resources, but the combination of this.
As previously outlined banks are characterized by a lot of legacy and have adapted a set of routines, processes and values through history that in turn complements the company’s culture (Christensen and Overdorf, 2000), which are perceived as core capabilities, as they
differentiate the bank strategically (Leonard-Barton, 1992). Each bank has individual core competencies and competitive advantages, but there are some competitive advantages most banks possess facing TPPs. One major competitive advantage is the banks distribution power and core competencies because they have had close to monopoly on customer data until now.
This has enabled them to build a well-established relationship with the customers based on long-term trust, which is hard to imitate (O’Reilly and Tushman, 2008).