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New payments regulation has the potential to shake up the banks
IN BRITAIN alone millions of people make formal complaints each year about
their banks. For them, Sebastian Siemiatkowski, founder of Klarna, a Swedish
payments startup, brings good news. New European rules, he says, will open the
door to a host of innovative services that analyse transactions, so an app
could tell you there s a cheaper mortgage available and start the switching
process for you. Apps could warn account-holders if they spend more than a
predetermined amount or are about to become overdrawn, or even nudge them to
save more. Customers need barely ever interact with their bank.
To date, despite dire warnings, European retail banking has been remarkably
unscathed by technology-driven disruption. Customers stay loyal, and banks
still do the most of the lending. Financial-technology ( fintech ) companies
are beginning to mount a challenge, most conspicuously in the online-payments
industry in northern Europe: Sofort, iDEAL and other fintech firms conduct over
half of online transactions in Germany and the Netherlands, for example. But
their reach is more limited elsewhere in Europe. Physical payments are still
overwhelmingly made with cash or bank cards.
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One reason incumbents have proved so resilient is that fintech firms lack the
customer-transaction information they need to provide many financial services.
Banks can be slow to respond to requests for access to such data, or may block
them altogether for security reasons. It is often either cumbersome or insecure
for customers to share their own information. Banks, on the other hand, have
easy access to transaction data, which they can use to sell their customers
other services.
Regulators, however, are about to transform the landscape. The Payments
Services Directive 2 (PSD2), due to be implemented by EU members in January
2018, aims to kick-start competition while making payments more secure.
Provided the customer has given explicit consent, banks will be forced to share
customer-account information with licensed financial-services providers.
This should change the way payment services work. They could become more
integrated into the internet-browsing experience enabling, for example,
one-click bank transfers, at least for low-value payments. Security for
payments above 30 ($32) will be tightened up, with customers having to provide
two pieces of secret information ( strong authentication ) to wave through a
transaction.
With access to account data, meanwhile, fintech firms could offer customers
budgeting advice, or guide them towards higher-interest savings accounts or
cheaper mortgages. Those with limited credit histories may find it easier to
borrow, too, since richer transaction data should mean more sophisticated
credit checks.
None of this is good news for established banks. Profitability is already
threatened by rock-bottom interest rates. According to Deloitte, a consultancy,
banks lockhold on payments serves as a handy source of income, earning
European banks 128bn in 2015, around a quarter of retail-banking revenue. Many
see PSD2 as a threat to their business models; they fear becoming the dumb
pipes of the financial system. In a survey conducted last year by Strategy&, a
unit of PwC, a professional-services firm, 68% of responding banks believed
that PDS2 would leave them in a weaker position. The same proportion feared
that they would lose control of interactions with customers.
Perhaps predictably, resistance is manifested as a concern about data
protection: more than half of respondents to the PwC survey voiced concerns
about security and liability. Such concerns are legitimate but also, argue
fintech supporters, offer a convenient excuse for banks to block competition.
Newcomers will be regulated, after all, and will have to convince the
authorities that their data-protection systems are robust. As they are also
required to be insured against losses from fraud, they will need to convince
insurers, too. They will not be subject to the same capital and stress-testing
requirements banks face: but nor will they be licensed to undertake the riskier
business of lending.
For his part, Klarna s Mr Siemiatkowski thinks PSD2 is perfect on paper . But
he worries that, as implementation approaches, the rules will be watered down.
Banks could also interpret them subjectively: they might delay sharing data or
make them too confusing to be useful. But regulators have already bared their
teeth: last year German competition authorities, citing the changes proposed in
PSD2, ruled that banks were illegally restricting customers online-banking
activities.
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Banks will have to improve, in other words. Several incumbents are already
adapting to the reality of the fintech challenge through partnerships and
purchases. Santander s British arm, for instance, has teamed up with Kabbage,
an American startup, to offer small companies working-capital loans; BBVA, a
Spanish bank, acquired Holvi, a Finnish startup that helps companies track
cashflow and invoices.
Yet for all their complaints, customers still trust banks with their money. In
Britain only 3% of customers move current accounts each year. Familiarity, huge
customer bases and low funding costs are all attributes entrants want to gain
by association, just as banks want to exploit newcomers technology. PSD2 will
improve the services available to European bank customers. Whether via
co-operation or confrontation is the question.