Implications of PSD2 XS2A adoption for banks industry

01 March 2016

For a bank to effectively operate amongst FinTech challengers, it should know exactly what it wants to be to its customers.

With the Revised Payment Service Directive (PSD2) entering into force on 12 January 2016 it is now official: providing payment account access (XS2A) to third party providers (TPPs) will be a requirement for European banks as of 13 January 2018. The exact security requirements for XS2A will heavily depend on the Regulatory Technical Standards (RTS), on strong customer authentication and secure communication channels that the European Banking Authority (EBA) will need to deliver. As these RTS will not be published before January 2017, many aspects regarding XS2A implementation are still unclear.

In this short blog we will cover the basics of XS2A and shed more light on this rather complex matter.

Banking - What do customers want

So, here’s what we know
Banks (account servicing PSPs under PSD2) will need to ‘open up’ two types of services: payment initiation services (PIS) and account information services (AIS). Both services require account holder consent and apply to all consumer and business payment accounts that are accessible online. This opening up will enable two types of licensed TPPs to enter the market: payment initiation service providers (PISPs) and account information service providers (AISPs). To obtain a license, these service providers will need to meet less stringent requirements, than e.g. the current payment institution licensees.

For PIS and AIS no contract between a TPP and a bank should be required. In case of disputes over unauthorised transactions where a PISP is involved, the bank remains the first point of contact for the account holder.

Implications for banks
Regardless of the exact content of the RTS, we can already see the following implications for banks. From January 2018, banks will find TPPs offering new services to banks’ account holding customers. Since these services build on the AIS and PIS offered by the bank, these services are very likely to overlap with today’s bank services. This may have implications for the way in which a customer sees and interacts with its bank.

This is most visible for AIS on the account holder – bank relationship, where a TPP could replace existing internet and mobile banking apps. Obvious examples of services in this domain are aggregation services (where account information of multiple bank accounts, held in different banks, is aggregated into one comprehensive view) and account balance services.

For PIS a bank may experience more direct impact on its business model as TPPs can directly compete on product and price with existing payment services offered by banks. TPPs do not require a contract, which seems to imply they are not subject to direct charges from the bank. The implications for PIS are most visible in the ‘acquiring’ or ‘creditor bank’ domain of a bank, where payment services are offered to merchants and banks will, thus, face more competition. This competitive pressure adds to disruption in the ‘issuing’ or ‘debtor bank’ domain, where interchange-based revenue from both cards and alternative payments might be at risk.

Vincent Jansen and Mounaim Cortet

Advice to banks
For banks to effectively operate amongst FinTech and bigtech challengers in the PSD2 era, it should know exactly what it wants to be to its customers. Banks need to determine a strategic value chain position that fits the bank’s capabilities and ambitions. This is key to being relevant to customers in the future.

An article from Vincent Jansen and Mounaim Cortet, Principal and Senior Consultant at Innopay.


The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.