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Why banks are gradually embracing PSD2, fintechs and Instant Payments

Why banks are gradually embracing PSD2, fintechs and Instant Payments

Paul Jennekens

Manager Marketing

18 October 2018

Why banks are gradually embracing PSD2, fintechs and Instant Payments

Banks closely monitor how technological innovations are rapidly disrupting the payments landscape. The introduction of Instant Payments, competitive fintechs and the PSD2 regulations have already put the business model of banks under high pressure. The impact of these innovations will only increase in the future as they develop more and more. Liz Oakes, Associate Partner at McKinsey & Company, tells equensWorldline why it is good that banks, partly under pressure from the PSD2, are increasingly seeking cooperation with fintech companies. She also explains how companies are discovering the power of Instant Payments.

Not compliance, but business opportunities

Banks’ attitudes towards PSD2, the legislation that gives third parties access to customer data, have changed dramatically over the last six to nine months. “In the past, banks used to think of compliance when the subject PSD2 came up, now a lot of them think of business opportunities,” explains Oakes. Although, she also indicates that the adaptation of PSD2 varies per bank and per country. The speed in which this payment directive is coming into effect differs per European country. Oakes: “Where banks stand with regard to PSD2 depends on national legislation, the size of the bank and whether they operate cross-borderly, but also on the mindset of the bank.”

With mindset Oakes means the way a bank looks at PSD2 and the related competition from fintech companies. Oaks: “The questions are: do banks see these developments as a threat or an opportunity? Do they just want to be compliant or are they actively looking for new products and ways to create revenue? The days when banks used to see fintech companies primarily as competitors that slowly want to push them out of the payments landscape are over.”

Banks and fintechs need each other

According to Oakes, banks now see that they need fintechs in the battle for the consumer. “The difficulty for many banks is that they are not used to a culture in which trial and error is normal, as is the case in, for example, the engineering industry. In the past, a bank could not easily test and fail, because this would have been at the expense of customers' money. That is why it is beneficial for the banking world to collaborate with fintechs, or even acquire them. Fintechs, on their turn, have also noticed that growing their customer base is a true challenge without partnering with an entrusted company, such as a bank. Fintechs can benefit of the reputation and established way of working that banks have built over a long period of time.”

Oaks hopes that cooperation will not only lead to mobile payment solutions, but also lead to real breakthroughs in the payment world. “You can see that banks and fintechs are focusing on payment solutions via mobile phones. Mobile phones are mainly owned by younger generations that can already manage themselves, right? But does this also apply to the more vulnerable people in our society? For example, how do you help an elderly home-bound person to organise his or her life as effectively as possible? I find that more important issues.”

Oakes cannot advise on a generic, ultimate way for banks to adapt to PSD2 or to enter into collaboration with fintechs. “This adaptation process differs per bank and also depends on its corporate goals and culture. If the infrastructure is outdated, it is probably best for a bank to go for a defensive strategy and to meet the legal requirements. If a bank wants to explore further and, for example, increase its market share, it might be best to go for an offensive strategy, which also leads to more investments. A bank can also outsource certain parts, as this can minimize investment costs and also give flexibility.”

Instant Payments are gaining momentum

PSD2 and the rise of fintechs are not the only developments that are currently underway, because the technological innovations follow each other at a rapid pace. Instant Payments, for example, will become increasingly established in the payments industry. Oakes: “From a corporate point of view, Instant Payments fulfil new customer demands. Banks and insurance companies, for example, can benefit majorly from Instant Payments.”

Oaks does mention a critical side note: “We do need to admit that it’s not essential for every payment to be processed instantly, so it’s important to find out in which situations and for which organisations Instant Payments are most beneficial.” She gives an example: “Many employers and employees are, for example, satisfied with paying and receiving salaries in the way they do now, at the end of the month. But, think of the payment of an insurance claim after a natural disaster. At that moment, victims need to receive the money immediately.”

Although this is just one example, Oakes is convinced that there are many more situations alike. “Instant Payments are gaining momentum, especially now that banks are reconsidering their infrastructure and the corporate side is discovering what they can do with this rapid payment technology.”