16 July 2018
David Andrzejek

The Changing Face of Payments

David Andrzejek - Apigee

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PSD2 could finally disrupt financial services

13 July 2016  |  6693 views  |  0

The financial services industry has arguably the most ground to make up to modernise its digital offering. As such, IT directors will have already saved the date of the EU’s open banking directive, otherwise known as PSD2, which will introduce clear guidelines for financial institutions to use application programming interfaces (APIs) to advance payments.


The directive has the potential to bring the attitude shift required to counter the caginess and obscurity in FS’s current approach to technological change. But just as APIs enabled telecoms companies to generate revenue from complementary services, if they’re well-handled, open APIs could disrupt the sector by streamlining finances.


1)            Regulate then innovate

To catch up with the pace set by fintech, as much as the expectations set by their more and more Digital-savvy consumers, financial institutions are feeling increasing pressure to bring a personalised digital service that draws on and amplifies success seen across other industries. However, in order to fundamentally change industry operations, banks need the power and flexibility offered by complex shared processes. APIs can then help financial services companies deliver on services previously claimed only by fintech, such as peer-to-peer payments.


Unlocking data and services through compliant systems can be a mammoth task from the perspective of operations, but for software developers, it may be central to driving ecosystem adoption. It’s also proven to be really, really effective. PayPal is just one example of a success story, which having integrated its payment service into a host of webpages has seen 19 per cent growth in total revenue after its payment volumes rose by 28.6 per cent in the last year.


2)            Standardisation is the next step for banks

Crucially, APIs offer the protocol required to keep digital transformation in line with PSD2 guidelines, while offering scalability to demand. By overhauling wider operations to reflect these abilities, it’s easier for companies to work towards a future ambition of offering a truly digital service. For this reason, we firmly believe companies should not treat PSD2 as an experiment, but as a means to meaningfully transform their current business processes in line with customers’ expectations of 21st century banking.


The PSD2 EU directive may unlock critical data and drive adoption of open banking as apps come closer to the core of business operations. With more focus on app and connectivity strategies, financial services companies are able to unlock their data and drive adoption of their service, while knowing that they’re following a robust framework of best practice.


3)       How to regulate effectively

In order to make the directive work for them, banks may need to balance the cost of ownership with access to infrastructure. By developing an open API standard for banking that welcomes the type of freedom Citymapper has capitalised on, third parties will understand how they can wrap their digital service around their customers’ needs. In practice, this could mean an app is developed that draws together the users’ finances and allows them to make direct transactions, without the need for an intermediary.


The Open Banking standard will raise the bar on banking practices, promoting secure, trusted and user-friendly banking, regardless of an institutions’ level of compliance. However, companies that do the bare minimum may fail to meet customers’ high expectations of digital services. Banks and other financial institution should react to PSD2 as if it was a starting gun, leaping at the chance to disrupt their dormant corner of the finance sector.


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