PSD2 represents a ‘golden opportunity’ for providers to deliver value to customers, with RegTech set to play a ‘huge role’ in the future according to Kunal Jhanji, principal in the retail and business banking practice at Oliver Wyman.
The second Payment Services Directive (PSD2) came into force earlier in 2018, bringing with it ‘open banking’ in Europe. However, the final regulatory technical standards (RTS) on strong customer authentication (SCA) under the legislation are set to apply from 14 September 2019.
Speaking about the impact PSD2 has had on the market thus far, Jhanji said it is still a compliance led movement, particularly given the delay in the RTS publication. The delay has led to a bit of a slowdown in operational activities because banks and other market participations are in the phase of getting ready for September 2019 when the RTS comes into effect and when the APIs come into play. That delay hasn’t helped the development of the market and has prevent new initiatives from being rolled out and seizing the Opportunities according to Jhanji.
“That has led to a bit of a slowness in the market as RTS mandates a lot of things around authentication, API-based or slightly tech-based interactions between different parties,” he told RegTech Analyst.
“As far as the market can get ready, they are getting ready. Equally there is a whole host of things which need to happen. The authorisation of the TPPs needs to happen, the infrastructure needs to be in place, the confusion around technogoly needs to be removed, the interpretation of some of these regulations needs to be narrowed down or made clearer.”
In today’s market people can reach out and get data from a bank, however, Jhanji questions how secure the solutions are, given the fact that authentication doesn’t come into play into September 2019.
He also notes a number of challenges arising from PSD2, including the need for a standard-based approach in each market. “The UK is benefiting from the open banking initiative, where by the Open Banking Implementation Entity is having a good impact on creating an API standardfor the UK.
“If you look at Europe the ecosystem is still very fragmented because there isn’t a single standard on APIs or interactions between different providers. That impacts the speed and the cost of developing a solution, as well as the complexity of developing and integrating with different providers.”
From the open banking point of view, Jhanji believes it is a similar sort of challenges where most people are still focused on compliance as it is very complex to securely open up the banking infrastructure, which has never been done before, and brings with it a number of challenges.
Opportunities
Whilst there are ‘a number of very small but complex details’ to be taken into account when developing these standards, when these are overcome, the key challenge for the market will be how quickly can propositions be rolled out which benefit and interest consumers according to Jhanji
He argues that now is the time to develop solutions and for the market to work on technology, compliance, and getting behind a particular solution type or standard as a way of communicating with other market participants.
“This is a golden opportunity for providers to really work with the market on not only external engagement, but equally on internal strategy, to really come up with something that will deliver value to customers, both retail and SMEs.”
This is where banks and the TPPs need to focus on and use the time between now and September 2019 to come up with ‘something innovative’ according to Jhanji
“The biggest thing for the banks is for them to really understand what is it which is going to really change the way the customer thinks about engaging with a product or service.”
He argues that pricing may not necessarily be the only leaver, pointing towards Amazon as an example. “Amazon prime, which is a paid loyalty program, has actually increased the revenue per customer by 2-times.
“The price isn’t actually very different, and in some cases, you might find prices better elsewhere. But it delivers convenience to the customer. That is going to be defining, creating an ecosystem which allows you to capture value for your customer and for your organisation. This is what I believe is going to be a radical shift in the way the Financial services market will operate.”
Regulators role
Whilst the European Commission is looking to support the market as much as it can, they realise that there are some challenges they need to overcome, particularly the multiple interpretations of the directive according to Jhanji. “The language is fairly subjective and leads to fragmentation of understanding, which leads fragmentation of implementation, which is not good.
“Consistent interpretation, or at least a narrow interpretation of the language, aids the development of a consistent market, which in turns benefits how compliance is done, how solutions are being develop, how propositions are being thought of, and how easy and less costly you make it for new participants to enter this market.”
The regulator’s objective has always been more competition and more innovation, focused on the small and nimble players, like FinTechs who are creating more digital propositions for the consumers.
“If that is true, those players don’t have as deep a pocket compared to some of the larger players. In order for them to play in these markets the regulator needs to support them with easier interpretation or consistent applications of the solutions or the regulations.”
However, in contrast, Jhanji stressed the importance of the regulator leaving the market to develop itself. He argues that the market doesn’t need an ‘extremely aggressive regulator’ or a regulator which ‘is directly involved in the market’ because that defeats the purpose.
“There is a very, very fine balance between enabling the development of the market and also not directing the market in a direction which limits innovation of the overall market.
Equally, market participants have a bit of a role to play. They need to come together to agree to set of challenges which need to be resolved as a result of the mediation of the regulator. However, that needs to be on a very policy level rather than a competition level, so the competition is aided and the regulators doesn’t necessarily interfere in that aspect of the market.”
RegTech
With regulations like PSD2 having a huge impact on how organisations in the market, RegTech has emerged over the past couple of years with the promise of reducing compliance costs and easing the regulatory burden.
More than $6.1bn has been raised by RegTech companies across 529 deals since 2014 according to data by RegTech Analyst. The sector appears to be continuing to rise in interest with more than $2.5bn having been raised in the first six months of the year. This is equal to 87.2% of the total capital raised by RegTech companies in 2015, 2016 and 2017 combined.
“RegTech has a huge role to play. We are already seeing RegTech providers partnering with large banks to deliver KYC and AML solutions; however, identity will be the next platform where a lot of players can offer support,” according to Jhanji.
“Identity is a fundamental part of the authenticated framework and is so important to smoothen that customer experience, but this isn’t easy to implement. For the customers to really have a frictionless or a positive-friction based journey, identity plays a huge role.”
From a KYC perspective, challenger banks are already deploying some of these RegTech solutions to onboard customers. The process takes a matter of minutes to get verified and have an account ready to use.
“That doesn’t happen without a slick ecosystem and some of the RegTech players, who are working in the background, are hugely important to the industry. RegTech is going to be in high demand going forward, both in the incumbent space and the newer smaller players who are focused on very niche propositions.”
Despite its obvious merits, Jhanji also urges the RegTech community to think about some key levers in order for them to have good adoption.
“Any player that has positioned themselves in this space needs to have a use case base approach. They need to be clear on what problem they are solving. Secondly their tech needs to be simple and agile, they need to integrate and not be costly. Thirdly, they need to be very clear on the objectives and benefits they bring.”
Earlier this year, Subas Roy, partner at Oliver Wyman, told RegTech analyst adopting RegTech and opening dialogue with regulators are both vital in helping the financial services industry achieve compliance.
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
