Disrupting Finance: How the EU Payment Services Directive (PSD2) will impact the European Banking System

PSD2 will affect over 1 billion customers and impact up to 40% of net banking income
The directive redefines the bank-customer relationship and represents the most important development in banking since accounts went online

Munich, February 8, 2017

Online and mobile banking via smartphone and tablet are the new normal. The Payment Service Directive 2 (PSD2) will take this to a new and more disruptive level. Due to come into force in 2018, affecting over 1 billion customers and amounting to up to 40% of net banking income in Europe, PSD2 will have a huge impact on our everyday financial affairs – and pose an equally huge challenge to banks and their business model. This is the main conclusion reached by Roland Berger's new publication "Successfully navigating changes to payments regulations: Payment Services Directive 2 – A strategic and technological challenge".

Study author and Roland Berger Partner Antonio Bernardo explains, "The changes being proposed as part of PSD2 are so disruptive that the whole business model of retail banks is likely to be turned on its head. The new directive is set to redefine the relationship we have with the banking system."

PSD2 gives consumers greater control over their financial information

In 2009, the first Payment Services Directive created the Single Euro Payments Area (SEPA). SEPA hit banks' profits hard as it dramatically reduced the settlement time for transaction payments as well as reducing fees on cross-border payments. It failed, however, to open up the payments business to increased competition and break the banks' pseudo-monopoly as a "tax on trade" in the way that regulators had envisaged.

So what is PSD2 exactly? In a nutshell, it gives consumers greater control over their financial information. So-called third party providers (TPPs) will be able to access bank account information, and initiate payments with the direct authority of the client. The directive authorizes incumbent banks to provide this information to the TPPs, which will include both account information service providers (AISPs) and payment initiation service providers (PISPs).

Banks to face stiffer competition

"For banks and their customers as well as for financial service providers," says co-author and Roland Berger Principal Ricardo Madeira, "PSD2 represents a world of opportunity and challenge." The opportunities are there for new non-banks and smaller banks to make inroads into the finance market. TPPs will be able to provide more dynamic personal finance management (PFM) services. By setting up TPPs themselves, banks too will have access to freely available customer information, and a much better understanding of customer requirements. For all players, the aggregation of personal finance management solutions with customers being able to access all their bank accounts through one portal represents the single most important development in convenience banking since accounts went online.

There is a word of warning for the big banks, however. As Ricardo Madeira puts it, "If the incumbent banks don't adapt and recognize the inherent disruptive force of PSD2, they stand to lose control of their client information and by definition the backbone of that relationship."

The challenges facing PSD2 are simple. New software and better authentication are essential to prevent convenience banking becoming a victim of its own transparency and simplicity. Biometrics could prove to be the more viable alternative to the use of tokens –however, one risk remains, as Ricardo Madeira adds: "More direct purchases without intermediaries and providing third parties with customer information naturally raise the question of security."

For the big banks, however, PSD2 could be the way to win back custom. Third party information would sharpen their marketing, improve customer risk profiling and provide an accurate up-to-date view of the customer's financial status quo. Disruption is not quite the new normal in the banking industry, but disruption as laid out by PSD2 could represent the start of a new and beautiful relationship.