Before I try to explain the PSD2 Directive and what new it brings into our lives, I suggest to consider one question: what would the world look like today if a simple money transfer could only be made after a visit to a bank? For many entrepreneurs as well as consumers it is a truly apocalyptic vision :). So, why such a question? Experts describing the PSD2 Directive emphasise that the consequences of its implementation are comparable to the emergence of electronic banking. We are on the verge of a great revolution, which slowly creeps into our lives, whether we like it or not. What’s more, the driving force behind the changes will not be banks, but entrepreneurs, who will get the chance to create products based on banking infrastructure.
Do you want to know the details? Sit back and open your mind to new ideas.
The PSD2 obligates banks to provide external suppliers access to their clients’ accounts via open APIs. In the following article I will try to explain not only what this change can affect, but also what an API is.
I noticed that understanding the mechanics of APIs for people who are not connected to the IT industry on a daily basis is quite difficult. Besides, mere understanding is not tantamount to the fact that we will see the benefits coming from the directive. Therefore, let’s start with an explanation what the API is and what are the implications of publishing it.
API is an abbreviation of Application Programming Interface. To explain what this interface is, it’s worth knowing how applications are built. The most basic division is: a database, an API and a part called the “client”. The database is nothing more than a place where data from our application is stored. Assuming that we have an online store, the components of the database are, for example, the names, descriptions and prices of the products. The next element is the so-called “client” (quotes in this place are not accidental), which is the part of the program that we see on the screen of our devices. Thanks to the “client” we can control the entire application. The “client” without the other two components of the software behaves a little like a car that cannot start. Theoretically, we can put it in gear and push the gas pedal, but nothing happens. The next element is the API. Perhaps the most popular way to explain the API is to describe a certain life situation. Imagine that you’re in a restaurant. From the point of view of the application, you are the “client” that I have just mentioned. You already know what you want to order, so you call the waiter over and place an order. The API in the application is just such a waiter in the restaurant (it allows the elements of the application to communicate with each other). After some time, the waiter brings you a meal from the database, I mean from the kitchen 🙂 So, the waiter is an intermediary between you (meaning the “client”) and the kitchen (i.e. the database).
I said earlier that banks are obligated to provide external suppliers access to their clients’ accounts via open APIs. Does this mean that customer data will become public? Of course not. A public interface is not the same as public data. This time, imagine the API not as a waiter, but a bank employee, and imagine that you want to check if you have any money in the account. When you ask a bank employee to provide you with such data, the employee is obligated to verify your identity. An API works exactly the same. It performs certain actions under certain conditions. It is also often referred to as the brain of the application. I think that you are slowly beginning to see how an application works, so let’s move on to the next issue. Does this mean in practical terms that we will have partial access to the banks’ APIs? Most of us probably use applications that give us access to our money online. Sometimes we use websites, and sometimes mobile applications. However, these are always services created by the banks. After the API has been made available by the bank, each company will be able to create its own application in which other users will be able to log in and, for example, check the status of their account.
We have already explained what the API is, so it’s time to think about the benefits of making it public. Of course, we can create web applications or mobile applications and display data from the bank account. But, what for? Banks have huge budgets and many years of experience, so is there any sense to spend money on tools that will compete with them? Besides, if they are even used, how to create a profitable business model based on digital services using the banks’ APIs?
The PSD2 Directive determines two new types of services. The first of these is PSI or the Payment Initiation Service. Using this service, by creating your own application you will be able to implement money transfers of your users. Building a business model on PSI is not so unfounded. At a first glance, this may seem irrational because the costs of transfers are often none. So where is the business? Domestic transfers cost this much, but have you ever wondered how much it cost to make a transfer to companies that, for example, do not have an euro zone in their country (I recommend checking it out by the way)? There are many niches that can be successfully filled in by correctly analysing the bank fees and commissions.
The next type of service is ASI (Account Information Service). It makes it possible to provide third parties with data from a bank account at the customer’s request. Of course, these entities may be banks, but also other entities such as accounting firms. There may be various reasons for making them available. Sometimes it will be a better offer, and sometimes it will be an improved flow of information that we are obligated to provide anyway.
In this part, I will discuss one more aspect of the public bank API, which in my opinion is very important. The banks’ APIs made available will be reduced to a common denominator, because PSD2 imposes certain requirements to be met. It gives the possibility to integrate all APIs into one. How would it look, assuming that each API of a particular bank is a different advisor and each of these advisors speaks one language? We can create a super consultant who will have the opportunity to talk to all banking advisors. Let’s assume that your company has services in 3 different banks. In bank “A” is has a current account in PLN, in bank “B” a current account in euro and a deposit in bank “C”. How does the use of these products look like now? You have 3 logins and 3 passwords and you move between websites to manage them. Integrating public APIs will result in that you will tell your API: “Hey buddy, give me data from the API of bank “A”, “B” and “C”. As a consequence, we will see products from different banks in our application. Interesting, isn’t it? And this is just the beginning of huge opportunities. At the moment, the companies take all their products to one bank, very often due to the inability to manage their products from one place. As a consequence, the decision on which bank will be selected is based on a certain list of priorities and a final compromise. Integrating the system will facilitate the dispersal of the company’s products, and hence, will also increase the competitiveness of the banks in certain areas. If we can open a deposit in a bank other than our main bank with a few mouse clicks, the product prices will automatically be better.
Before summarising the whole topic, I will briefly describe the financial aspect of these changes. In a simplified way, the way the loan process looks now is that the bank determines the risk of a given applicant and decides whether to grant the loan, the maximum loan amount and the interest rate. At this point, it is worth mentioning the determinants of loan approval. The first of these is creditworthiness. Not wanting to quote the dictionary definition, what’s most important for an applicant is how big of a loan can he eventually obtain. The second thing is credibility or credit score. It describes the risk that a given applicant carries. In order to assess it, the bank looks at your credit history, the industry, trends in financial results and (which is often not mentioned) your behavioural assessment. Banks divide customers into segments, regardless of the credit score, an internal client will be better assessed than an external one. The definition of external and internal customer varies depending on the bank, however the most important aspect is the same. The better the bank knows its applicant, the better it is able to assess it. This can be easily translated to everyday life. When the choice is between a person whom we have never lent money, and one that we know and we have already lent to several times (and they always pay it back!), then we will choose the person we know. Banks do the same. They do not want to give a loan to everyone, they want to give to those who will pay it back. And to know who is solvent, they must have a lot of information. Statistics are used in cases of greater uncertainty. The product price is the cost of the risk plus the bank’s margin. Therefore, when all customer information is made available to all banks, each of them is treated as an internal customer. The banks will be able to say “Although this company does not have an account with us, we know about it as much as we know about our clients”. Until now, going to a competitive bank, we were thrown into a bag called “we don’t know this company too well” and our offer was averaged. Therefore, if we were honest, in our interest payments we also covered the costs of granting loans to companies that did not want to pay them back. Finally, I want to add that the PSD2 will most likely lower the prices of products, including loans, but at the same time it will improve the credit portfolio of banks. As a result, banks will be able to offer cheaper loans on which they’ll earn the same amount.
The main goal of legislators who designed the PSD2 Directive was to create the conditions for faster trading of money. Some companies will have the opportunity to create their own applications and get closer to the financial sector, others will create innovative products that will significantly facilitate the management of their own money.
It is worth remembering that PSD2 is an EU document, so its range and implementation effects will be similar on almost the entire continent. In addition, the officials designing this bill have not forgotten that such a solution has to be safe and cannot adversely affect the banking sector. This is one of the few legal acts that will have a broad positive impact on the development of business and the quality of financial services. Public APIs of banks will result in many applications offering services of many banks at once. This will help not only in reducing the costs of financial products, or shortening the processing time of loan applications, but what is very important, will improve the transparency of offers.
The data from our bank accounts will be a tasty morsel also for companies unrelated to banking. I gave an example of accounting firms that use their clients’ account history to make a booking. However, it is worth considering other ways of using the bank account data that will benefit our current and potential clients. What’s more, PSD2 is a chance to find an answer to the question – how to manage your money more effectively. Perhaps an idea for creating an application that will make this easier is being born in your mind right now? 🙂