As banks and payments providers consider new European Commission regulation, along with other regulatory changes, many are moving into damage-limitation mode. Some, however, see opportunities in the opening up of customer information to others
The revised Payment Services Directive (PSD2) will come into force less than a year from now, but the full impact of the changes that it will bring to banks are still emerging. As banks come to terms with the huge threat the European Commission directive poses to their traditional business models, regulators are still fine-tuning their requirements and fintech startups are identifying opportunities. Meanwhile, brands such as Amazon and PayPal could be preparing to eat the lunch of banks and credit card companies.
The opportunities presented to financial aggregators will be a key factor in shaking up the market, according to Amanda Hulme, head of financial services at Addleshaw Goddard LLP, and a specialist in this field. “Aggregator firms have been accessing customers’ financial information such as current account transaction information for a while, but until now they’ve faced legal and practical challenges when doing so,” she says.
“However, under PSD2, aggregators will be regulated by the Financial Conduct Authority, and banks won’t be able to prevent them from accessing this information and using it to offer their own services such as loans, savings or debt advice.”
Alongside this, the new Payment Initiation Service Providers (PISPs) will be able to initiate credit transfers and faster payments. “This means a PISP can build a very user-friendly front end that the customer can use to make purchases or transfer funds,” says Ms Hulme. “So banks cannot prevent other companies from delivering these services, provided they utilise a secure means of doing so, which are to be set out in agreed European standards.”
Meanwhile, the UK has initiated its own reforms in the form of the Open Banking Standard, with leading banks required to agree on how they will open up services and make bank account information more easily accessible. “Essentially, it means you will be able to take your bank account data and put it into a price comparison site to see whether you’re better off with another bank that would have charged you less for transactions and overdrafts, for instance,” says Ms Hulme.
Banks are in danger of simply becoming the network through which these customer-facing services operate
Private banks might also face threats from PSD2. She says: “They enjoy a very personalised relationship with their customers based on their understanding of those customers. Another provider, perhaps an asset manager, could build a platform integrating the customer’s bank account, and have access to account data that enables customers to manage a number of different investment and services in a more accessible and coherent way.”
The challenge, therefore, for banks is to maintain the customer relationship, according to Fiona Ghosh, head of Addleshaw Goddard’s fintech group. “Over the next few years you’ll see Amazon encroaching into devices with the growth of the internet of things. For example, my washing powder container can already signal when it’s running low and initiate an order for more with payment through Amazon. We’ll see growing connectivity between devices, between the public and retailers when it comes to payments,” she says.
Ms Ghosh cites the success of Apple Pay: “Apple’s not an infrastructure provider, it’s a technology company. We’re seeing this cultural shift. On a more practical level banks are in danger of simply becoming the network through which these customer-facing services operate.”
The future for banks might look grim as the changes brought about by PSD2 take hold, but both lawyers believe it also presents exciting opportunities for those enterprising, forward-looking institutions that are willing to exploit them.
Banks could look to buy aggregators, suggests Ms Hulme, while Ms Ghosh is already advising banks on acquiring and collaborating with new fintech startups. The firm has developed a specialism in this fast-growing sector, in particular with its fast-track programme AG Elevate.
“We act as legal mentors and advisers,” Ms Ghosh explains. “We advised many issuing banks on Apple Pay, for instance. We know the implications for the banks, and we can assess the risks of going into a venture from a regulatory and transactional perspective.”
Banks might have to change their mindset when working with these new tech businesses, she argues. “They’re often heavily policy driven and risk averse, as they’re driven by customer complaints. They want to work with startups, but they’re not clear strategically about what they want to get out of it. They focus on protecting their intellectual property, whereas fintech is more collaborative. That’s where we can bridge the gap between the two.”
The fintech companies that can provide banks with the new technology essential for maintaining customer relationships and preparing themselves for PSD2 also have to rethink their approach. For example, although finance is heavily regulated, some fintechs will only look at the legal risk when they’re quite a long way into the development journey.
“They tend to think that they’re the first,” says Ms Ghosh. “But AG Elevate gives us an overview so we can see other versions of their product. It’s not just about having a clever idea – it’s about the practicalities of bringing it to market. For those that can overcome these challenges, and for the banks they’re now working with, PSD2 offers real opportunities.”
For more information please visit addleshawgoddard.com
AG Elevate is a fast-track 12-month programme that enables fintechs to move quickly and effectively through the legal challenges faced by startups in the tech space. These startups get access to legal mentors and advice and training on the law by experts in this field, as well as networking opportunities.
The programme is free to those chosen to take part and consists of two options, depending on whether an early-stage fintech startup has received more than £1 million of seed or Series A funding to date or not.