13 February 2017
If you ask Gijs Boudewijn, deputy director of the Dutch Payments Association, payment processing will become increasingly automated in the future and will become part of a seamless user experience following the formal implementation of the new Revised Payment Service Directive (PSD2) next year. And this is just one of the many changes we can expect to see, because while banks and payment institutions were initially somewhat slow to embrace the new directive, they have since come around, aware of the many opportunities it will open up for them. “The industry has accepted the new reality.”
Threat becomes opportunity
In late 2016, Dutch newspaper De Telegraaf ran a revealing article headlined ‘Bankbedreiging nu een kansenfestijn’ (‘Banks transform threat into wealth of opportunities’). The ‘threat’ cited by the author refers to the PSD2 Directive (Second Payment Services Directive), which entered into force in January 2016, replacing the original Payment Services Directive. All European banks and payment institutions will be required to comply with the directive from January 2018. Two of the objectives of this EU Directive are promoting innovation in the financial industry and making payment transactions easier for consumers. Several established financial services providers perceived the new players now gaining access to the financial market – which has long been dominated by banks – as a competitive threat.
Gijs Boudewijn explains: “The banks obviously had to get used to the idea of innovative start-ups potentially muscling in on their business, and marketing their services directly to their customers. The notion of a third party having access to customers’ current accounts would have been inconceivable just a few years ago. There was some initial apprehension among payment services providers due to the greater competitive threat they faced, as well as legitimate concerns about issues such as security and privacy. However, we’re currently at a stage where the industry has accepted the new reality. Existing payment services providers will need to reinvent themselves in order to be able to develop new services faster and more successfully.”
Chris Buijink, Chairman of the Dutch Banking Association, feels that traditional financial services providers have what it takes to succeed in the new market. “Banks reach a lot of people beyond even their own customer base, and are also trusted by the public as physical and virtual depositories of money and personal data. It’s important to protect customers’ privacy if third parties gain access to payment details through account information services. And at any rate, any type of access to current accounts must be highly secure at all times.” From this position, established players have discovered opportunities to remain competitive in the ‘new’ financial market. Buijink: “Banks regard PSD2 as a positive change and a driver of innovation.”
So where, exactly, do the opportunities lie? Boudewijn: “People will be able to manage all their banking needs on their mobile phone, and payments will be settled in real-time. Actual payment processing will become increasingly automated and will become part of a seamless user experience, which could mean anything from ordering a cab to making an online purchase.” Boudewijn is confident that consumers will end up the winners in the new market: “They will have a greater number of providers and innovative services to choose from, and they will also likely end up paying lower fees for these services on account of the increased competition.”
Battle for the customer
Boudewijn does not think new businesses will have an easy time crowding out established players. While fintech start-ups may launch all kinds of exciting new products and services in the market, it will take more than that to win the battle for the customer. “Many fintech start-ups don’t fully grasp the implications of being subject to the financial services regulator and having to comply with their rules. A technology company can’t just break into financial services without any previous credentials in the industry; it takes trust and critical mass to achieve success in that market,” he explains.
And as it turns out, that’s not all there is to it: “On top of that, you’re also expected to deal with legislators and regulators. A large number of fintech start-ups will end up folding or being acquired by other companies, or they will wind up seeking alliances with existing players. I don’t see much of a future for challenger banks, which essentially provide the same types of payment services as established players.” The fact that, as Boudewijn explains, the payments industry is not the most lucrative of sectors and therefore unlikely to spawn a wave of new startups means that the future of traditional banks is not quite as precarious as it might have seemed.
Banking is necessary
During the transition to a new financial system, banks have another responsibility they can’t afford to neglect: “Banks want to create digital trust, now and in the future. When using data such as payment details and personal details for new applications, the customer is always in control. Since third parties can gain access to the customer’s current account and transaction details, good, independent regulation is vital,” Buijink says. “Third parties must apply for a permit from the national regulator, so you need to have solid regulations in place there, too.”
Boudewijn does expect one aspect to change for established players when PSD2 enters into force. “Bill Gates said way back in 1997: ‘We need banking. We don’t need banks anymore.’ In 2015, he said essentially the same thing, only changing the wording slightly: ‘Banking is necessary, banks are not.’ But the fact is that banks as we have always known them are still around, and will be for quite some time. That’s because payments play a vital role in our economy; they’re what keep the financial world spinning, so to speak. Payment processing also happens to be heavily regulated, precisely because it is so essential. And the types of institutions entrusted with this role are still what we call ‘banks.’ We’re not going to see any changes there, although the bank of the future will look very different and operate quite differently from today’s banks,” Boudewijn says. “For one, your stereotypical pinstriped bankers will be replaced with more dressed-down hipster types, if you will. Also, banks will no longer be physical locations with marble floors and so on, but will be located somewhere in the cloud instead. They will continue to be subject to regulation, but the basic format, the guise in which they appear, will change. I think that’s really what Bill Gates was getting at when he said we wouldn’t need banks anymore.”