Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

New European rules will open up retail banking

Posted by hkarner - 23. März 2017

Date: 23-03-2017
Source: The Economist

The dangers to privacy and security are outweighed by the benefits

MORE treasured than the bullion in its vaults are the data a bank has stored on its servers. Bankers know what their customers eat, where they shop and, increasingly, what they get up to online. It is possible for customers to share these data with others, but the process is cumbersome. In effect, banks enjoy a monopoly over data that has helped them get away with lousy service and fend off newcomers with better ideas. In Europe, at least, that is all about to change.

The source of this upheaval is a new set of regulations, snappily named the Second Payment Service Directive, or “PSD2”. The rules, which are being finalised and will be in force from January next year, will compel banks to share data easily with licensed third parties (if that is what their account-holders want). Bankers in Europe squeal that their profits and customer relationships are under threat. Fearing they could be next, America’s bankers are already lobbying their regulators to keep their data monopoly intact. Such reactions are predictable and wrong.

Opening up banks, and the data they hoard, is good for consumers and competition. New providers will be better placed to offer all sorts of innovative services. Apps might ping users when they are spending too much on booze or shoes, or offer them a one-click option to put unspent monthly income into a pension plan. Analytical tools might swiftly aggregate a person’s financial data in one place, or combine banking data with other information to offer individuals the best mortgage or loan. The new rules, which also compel banks to share payment infrastructure with licensed third parties, should make online shopping simpler and cheaper, too.

Some concerns about PSD2 are legitimate. In particular, it is reasonable to wonder about the privacy and security implications of sensitive financial data being shared with third parties. But banks themselves are hardly invulnerable to cyber-attack. And the way that European regulators propose to deal with these worries looks promising.

Third parties that want to use bank data will need to convince national regulators that their data defences are solid and must submit to annual inspections. Newbies must also take out fraud insurance; their insurers will have a clear reason to demand state-of-the-art cyber-security. Many online payments will become more secure than they are today, because of the directive’s requirements for the use of a robust authentication process involving two-step verification.

The gap between writing rules and implementing them is always large, so a few things are needed to make PSD2 a success. First, consent from customers to provide access to their bank data must be gained explicitly, not buried in pages of gobbledygook. The purposes for which data might be used should be clearly explained; and individuals’ consent to share their personal information should be easily revocable.

Second, regulators must be ruthless both in ensuring that banks open up their infrastructure to others and in withdrawing the licences of third parties that break the rules, particularly on cyber-security. Third, they must also be flexible enough to allow for change as the market evolves. Since the new entrants will not be licensed to engage in riskier forms of finance—such as lending money—it makes sense to regulate them with a lighter touch. But if some fintech providers do end up becoming systemically important (by, for instance, controlling a dominant digital wallet), higher standards of oversight might be necessary.

More important now, however, is that regulators hold their nerve in response to bank lobbying. Opening up bank data gives fintech firms the opportunity to build new businesses and incumbent banks the incentive to improve their services. In both cases, the winner will be the consumer.

Date: 23-03-2017
Source: The Economist
Subject: An earthquake in European banking

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.

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.

Hot data
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.


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