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, competition from fintechs and the PSD2 regulations continue to put the business models of banks under extreme pressure. Liz Oakes, Associate Partner at McKinsey & Company, explains why it is good that banks, partly under pressure from the PSD2, are increasingly seeking to co-operate with FinTech companies. She also explains how companies are discovering the power of Instant Payments.

Not to concentrate only on compliance, but to focus on 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 of PSD2 came up, now a lot of them are thinking of the wider business opportunities,” explains Oakes. Although, she also indicates that the implementation of PSD2 varies per bank, because 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-border, and 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. “The questions are: do banks see these developments as a threat or an opportunity? Do they just want to be compliant with regulation 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 could 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, in their turn, have also noticed that growing their customer base is a truly challenging without partnering with a trusted company, such as a bank. Fintechs can benefit from the reputation and established way of working that banks have built over a long period of time.”

Oakes 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. Sophisticated and expensive mobile phones are mainly owned by younger generations that are very digital savvy, 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 if they are unlikely to have digital access? These are important issues as we seek to provide customer-centric services that are also inclusive.”

Oakes is of the opinion there is no single 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 customer base, 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 minimise 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 can provide new customer experiences and meet demand for instant solutions. Banks and insurance companies, for example, can benefit from the immediate results possible with Instant Payments.”

Oakes 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 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, the ability to deliver a positive experience to a victim who needs to receive the money immediately is valuable for all concerned.”

Although this is just one example, Oakes is convinced that there are many more similar situations. “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. The ability to initiate e-billing and e-invoicing with request to pay capability could revolutionise mobile e-billing and supply chain management.”

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