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Payment Services Directive 2: What’s the future for Nordic banks in the new payment landscape?

New regulation, in the form of the Payment Services Directive 2 (PSD2), will create changes that will threaten banks’ existing revenues from processing payments and transactions. By opening up third-party access to accounts and mandating the use of APIs to enable new service offerings, PSD2 will shake up what has been a slow-moving and routine marketplace. At the same time, of course, these changes also create new possibilities for revenue from innovations in payments technologies from which banks could profit. But they face considerable competition both from innovative start-ups in the fast-growing fintech sector and potentially businesses in other industries such as telecoms and retail that are actively targeting this market.

The banks in the Nordic region are at various levels of readiness for the post PSD2 era. This has been a relatively stable and steady market for the last two decades. But with PSD2 and disruptive fintech players introducing innovative new services, the safety of banks’ position in the payments and transactions value chain looks less secure. The market is changing fast. But precisely because transactions and payments have for a long time been seen as low-level and routine activities, they have attracted little in the way of the focused strategic thinking and investment that has been devoted to other, more high profile, areas.

However, we’re already seeing signs of the disruption to come. Technologies such as Blockchain hold the promise of truly revolutionising how payments and other transactions are executed and recorded across a distributed ledger. However, there are few services using Blockchain in production today. But there are already plenty of innovative new payment solutions that are taking small bites from banks’ traditional revenues. In addition, new services could start to have an impact on customer relationships and touchpoints—with the potential to put at risk more than just revenue from payments. And while these new players will not dramatically impact the banks’ business in the short-term, if the challenges they raise remain unaddressed then banks will likely experience significant upheaval. So what should they do in response?

One key task is to convince senior management that the market is set to change rapidly and radically. Armed with that understanding they need to start putting in place the strategic actions that will position them for a very different payments and transactions landscape whose arrival is just a few short years away. That task needs to begin with a clear understanding of PSD2’s implications, and clarity about banks’ future position in this new environment. And while attention has to date focused on disruptive changes to the consumer market, corporate payments should not be overlooked. The volume of transaction revenues this sector generates dwarfs those from consumers.

To ward off the threat of future competition, some banks have already acquired new players providing services, for example, to online merchants. They also need to develop clear strategies for partnering with both fintech companies and established players in the market. But there is a risk that these defensive strategies will not go far enough in addressing the much wider disruption that will arise. Future changes are unlikely to be restricted simply to payments themselves. Instead, we’ll see a range of innovative new entrants using consumers’ financial and spending data creatively to generate new insights and services that will have real value. There is no reason, of course, why banks themselves could not play that role. But they need to prepare for it as soon as possible. The window for change is closing fast.


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