Implementing PSD2 and XS2A in wholesale banking

21 December 2017 6 min. read

While much of the attention of the general public and the financial services community for PSD2 goes to the retail banking segment, the wholesale banking segment has seen little of the spotlight, comparatively. However, as the regulation and its guidelines allow for many grey areas that are left to the interpretation of each player in the market, wholesale banks should carefully design and plan their operating model for PSD2, writes Constanza Diaz, a consultant at FiSer Consulting.

PSD2, which comes into effect in January 2018, was conceived mainly as regulation for the retail banking landscape, and as a result a number of wholesale banking-focused institutions are struggling to come up with a proposition, even though they’re still forced to implement this regulation. The way banks, and institutions alike, define grey areas will be key in shaping how the future financial services sector will look for SMEs and corporates clients. On the other hand, how defensive or welcoming their strategy is will impact on how fast new levels of innovation is reached within the industry, and which parties will benefit the most.

The PSD2 directive and its set of supporting Regulatory Technical Standards (RTS) are the result of an ongoing process of demanding policy development with the input of myriad stakeholders’ contributions and apprehensions. This process has resulted in a complex directive and RTS documents that attempts to balance several objectives: protecting consumers and companies when they conduct online payments, enhancing data security; promoting the development of innovative payment services with a higher customer experience, all while ensuring technology and business-model neutrality; and further integrating the payments markets in Europe.

Implementing PSD2 and XS2A in wholesale banking

With this new, complex set of rules, banking leaders, and other Account Servicing Payment Service Providers (ASPSPs), not only need to adjust their existing legacy systems and build the capabilities to enable the connectivity of third party providers (TPPs) with their client’s data, but also to make appropriate business decisions ensuring compliance with the new law and taking into account the expected movements of the existing and potential competitors in the market.

In the wholesale banking segment, one of the key decision to be taken by banking and ASPSPs leaders is which existing channel will be selected as the reference channel, when potentially being challenged on the service fairness between the XS2A (Access to account) offering and their proprietary channels. Under PSD2 banks must demonstrate that they’re not discriminating against any TPP when they seek to access client’s data and initiate payments. However, within wholesale banking as well as in retail banking, but to a lower extent, many different channels exist with distinctive product offerings, service levels and customer experiences. Selecting this reference channel gives banks the opportunity to review their existing value proposition and revenue model related to each of their customer segments. It also allows them to review the status and vision of their omni-channel strategy.

Scope of TPPs

In addition, banks and ASPSPs will have to determine which types of payments products could be initiated through a TPP. In contrast to retail clients, wholesale banking clients have a wider set of needs and behaviours. Thus, they hold payments accounts in different currencies and geographies, and payment product offerings are much more diverse, including not only single credit transfers, but also multiple payments, salary payments, file-based payments and scheduled payments. The degree of openness that a bank strategically chooses to pursue should be directly linked with the selection and flexibility of payment products available to TPPs.

Flexibility in turn results in higher risks related to security, and hence banks and ASPSPs need to be cautious with defining the set of procuration rules and authorisation structure with different payment value thresholds that will be available through TPPs. Ultimately these practices should be aligned with the existing ones in their channels and other internal practices regarding Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT).Quote Constanza Diaz

This law, which intends to foster both innovation and customer protection, has its impact and success strongly linked to industry players’ interpretation of law and business decisions, in particular in the wholesale banking sector. Extremely prudent interpretation and defensive strategies by wholesale banking ASPSP players might lead to a situation where there’s no additional value for customers, innovation remains at the same level, and only security and data protection risks are amplified. Moreover, different implementation approaches will, most likely, lead to a fragmented industry in terms of standards and customer experiences that will make more difficult to TPPs to offer in the short term value-added services to the SMEs and corporate segments.

While at the retail side, large tech companies with enormous consumer data resources, such as Amazon and Apple, and quick-thinking FinTechs are expected to benefit the most, in the wholesale banking domain ERPs are predicted to be the big winners, if they seize the opportunity to expand through the value chain. At a minimum, ERPs could start by becoming the single point of contact with corporate and SMEs customers, enabling them to access banking services directly through the ERP platform, in a secure and customised way. Additionally, ERPs, and other more-mature FinTech companies, could offer services such as payment aggregation, payment automation, integrated budgeting and expenses categorisation, payment-invoice matching, added-value reporting solutions, and so on. These services could provide a better experience to SMEs and corporations or, at the very least, lower their total costs of ownership.

Openness and collaboration

Under this scenario, the market as a whole will benefit the most if leading industry standards for PSD2-related services arise, in terms of both technical and business aspects, and thus more efficient business model are implemented with a higher customer experience. A joint effort by main financial services institutions is needed to reach this state. With more than 4,000 banks in Europe this is not an easy task and there’s a high risk of fragmentation across the industry if financial institutions don’t try to open their systems in an interoperable way. And although there currently are a number of standardisation initiatives arising in the sector, a higher degree of maturity and broader range of market actors need to be reached by them.

One thing is clear though, whatever the final outcome will be for the wholesale banking segment, PSD2 represents the first, clear step towards a major transformation in the financial services industry and banks must give appropriate importance to its design and implementation.

Related: European banks continue to transform to meet standards.