What are the main challenges for the Nordic banks?
Worldline’s dialogue and collaboration with several Nordic banks over the recent years shows that the Nordic banks in general are eager to exploit the opportunities of PSD2 and do more than just becoming compliant.
However, the Nordic banks face one major challenge that they need to address in order not to come up short and miss the opportunities of PSD2.
Because the Nordic societies have been digitally in front of most other regions in the world for a long time already, there is the risk of a growing degree of self-complacency that can hinder innovation.
This goes for the Nordic citizens as well as for the Nordic governments, and the Nordic businesses including the banks. This means when the banks start believing that they are comfortably ahead, they are in danger of losing innovation power and drive. If they feel no burning platform, simply because they trust that they are born to stay in front they are almost already lagging behind. Accenture underlines the same point in the whitepaper Digital disruption in Nordic retail banking:
“The good news: Nordic banks are running very profitable businesses, especially compared to other European players. The bad news: This has led to a degree of complacency and a lower sense of urgency for Nordic banks to transform in the digital space.”
As PSD2 is bound to accelerate innovation, the banks must be up on their toes if they want to stay relevant and avoid losing out to the countless numbers of ambitious fintechs who are trying to steal their market share.
How can Worldline help Nordic banks turn PSD2 into an opportunity?
The number one challenge for all banks caused by PSD2 is how to implement the requirement of providing access to accounts in a cost-efficient manner without jeopardizing the bank’s security, losing customer relationships and basically without reducing themselves to the proverbial “dump pipes” (still with the potential cost of liability!), while the TPPs take over the end-consumer relationship.
Obviously, this overall challenge is comprised by many layers of underlying challenges that belongs on different levels, which all require different sets of tools and services, and Worldline can assist the banks with all of them. Worldline has developed for a group of European banks, fully functional proofs of concepts for the Payment Initiation Services (PIS) and the Account Information Services (AIS), build on APIs and fully integrated into existing routing applications. These demonstrate both how these services work in practice as well as how the user experience can be.
Being a European company with profound knowledge of the European and Nordic financial market with a comprehensive suite of services and solutions that are either created for or translates perfectly into the PSD2 ecosystem, Worldline is in at unique position to assist the banks in asking and answering the important strategic questions brought on by PSD2.
Worldline plays an active role in two of the central entities shaping the future of PSD2 implementations across Europe – The Berlin Group and CAPS.
The Berlin Group is (despite its name) an international group focused on developing interoperability standards for payments across Europe. The group has several Nordic members. Worldline has been part of the group since its start in 2004 and is a central participant in the group’s PSD2 task force. The ambition is to help ensuring that PSD2 will also work in practice as a potential failure of PSD2 is only more likely to lead to more rigid legislation.
By participating actively in this work, Worldline contributes with its pan-European insights and experience in the standardization work while at the same time ensuring that Worldline stays in the forefront information-wise. All to the benefit of Worldline’s clients.
The same ambition underlines Worldline’s involvement in CAPS (more details on CAPS later in this paper). One thing is the basic compliance, but in order for PSD2 to really work and get traction and scale, a number of other things needs to be put in place. This can be everything from directory services, dispute management services, development tools, authentication solutions, mobile integration to name but a few. By gaining insight and influence through its involvements, Worldline can ensure that its service offerings remain relevant to its clients.
Worldline can also provide the banks with secure, solid and compliant infrastructure components and help them prepare for open banking if they want to venture into this line of business. Worldline already has several PSD2 related services available in its portfolio such as routing services, secure customer authentication services, and risk management solutions services that are all elements in a typical PSD2 compliance package for banks.
Solutions for ASPSPs and banking API
Some of the most progressive banks are already scanning the new area of Open Banking (more on that later), and others have set out to become a TPP themselves. Those aiming for the TPP role are mainly banks, who are very active in the acquiring business. But also, retail banks with a lot of account holders might have strong interests in developing PISP and/or AISP services available to their end customers.
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Regardless of whether a bank aims just for basic compliance or wants to go much further Worldline has the ability and the competences to act as trusted strategic advisor as well as technical service provider all the way. Worldline does not offer any of its services directly to the consumers which allows for a clear division of roles and responsibilities when servicing its bank clients.
Convenient Access to PSD2 Services (CAPS)
As a point of reference for all PSD2 activities Worldline together with equensWorldline have co-developed an open framework concept called CAPS (Convenient Access to PSD2 Services) with the aim of defining joint pan-European PSD2 standards - both technical standards, standards of operation procedures, standards for dispute management, and a standard directory, which can be used like a search engine and for instance allow for the TPPs to easily reach in principle all of Europe’s around 4,000 banks at once instead of having to reach out to them one at a time (the TPP’s main interest is to get easy access and if possible one single entrance to all the banks).
The reason why CAPS is necessary is that neither the PSD2 itself nor the Regulatory Technical Standards (RTS) from European Banking Authority (EBA) will be sufficient to make PSD2 work in practice. The directive and the RTSs only offer broad guidelines that could potentially lead to a highly fragmented market. We saw that with SEPA, which unfortunately led to many different SEPA implementations and even different standards (as the old joke goes: “Standards are wonderful because there are so many to choose from!”).
The CAPS concept was first developed by the payment processors Equens (shortly before the announcement of the merger between Equens and Worldline), Nets and Vocalink in 2015. The three companies realized that for PSD2 to take off and follow the timeline and for the different stakeholders to overcome the obstacles and utilize the opportunities in the directive there was a need for a standardized and open framework that could act as a catalyst and secure a smooth and effective process especially between the TPPs and the ASPSPs (primarily the banks).
This common realization led to Controlled Access to Payment Services (CAPS), which was later changed into Convenient Access to Payment Service (CAPS), and the concept was first described in the White Paper on CAPS for PSD2 published in August 2015.
The white paper outlines several challenges expected to be caused by PSD2 that CAPS intends to help to mitigate. This to the benefit of the TPPs and the ASPSPs - but also the merchants and even the consumers:
"For PSD2 to be a success it must be embraced and adopted by the market to foster and promote innovation and competition. In reality, this must be underpinned by simple, modern and flexible API infrastructure and authentication methods.”
Furthermore, basic standards and common principles are needed across the thousands of European banks to avoid that the TPPs - whether AISPs or PISPs - must comply with new rules and demands for every new ASPSP they engage with. Instead, CAPS suggests that all Access to Account should be granted through a fully standardized API.
CAPS’s intention is to avoid a rapidly increasing ‘fragmentation effect’ as a direct result of PSD2, which could lead to plain chaos in the market among the many TPPs across Europe and work against EU’s intention of creating a level playing field and an open and competitive market.
Additionally, CAPS intend to develop a suite of tools for TPPs to ease their adaptation and utilization of PSD2 and to outline standardized processes for resolution of for example liability disputes between TPPs and ASPSPs caused by consumer charge backs.
Benefits of CAPS for Banks and ASPSP
CAPS provides banks with an efficient and effective way to connect to a potentially large number of TPPs. This places the bank account at the center of the payment experience.
Likewise, the TPPs gain access to numerous bank accounts simply by using CAPS through equensWorldline.
Additionally, the framework provides banks and TPPs with a way to work with standards for the on boarding procedures, secured service levels, harmonized operational procedures for areas such as dispute handling, standardized authentication for TPPs, support of different authentication models and, finally, extensive risk management services.
Since the beginning, the CAPS group has grown from three to a large cross-industry cross-country community and in September 2016 CAPS published a second, updated white paper describing how the CAPS concept and the CAPS principles are now developed as specific services by the growing number of CAPS Service Providers.
While agreeing on standards, these CAPS Service Providers – including equensWorldline and Worldline – compete directly to provide their services to banks, fintechs, and merchants.
Long before any European bank started thinking about Open Banking companies like Amazon (2002), Twitter (2006), LinkedIn (2009), and IBM (2013) realized the value of opening (some of) their APIs to the outside world.
Within the payments industry PayPal took the lead by introducing open APIs as early as 2004, when they first launch their developer portal and started inviting external developers to build new services to enrich the PayPal community. Since then both MasterCard (2010) and Visa (2016) have now opened their own developer portals.
Among the banks, the use of open APIs is still relatively new and only few banks would be able to claim to have an implemented Open Banking strategy. Some of the current front-runners are BBVA35, Crédit Agricole, challenger bank Fidor (acquired in July 2016 by French Groupe BPCE), and Danish Saxo Bank. The latter has frequently highlighted the qualities of what they call a “collaborative economy”36 through the use of open APIs, as a prerequisite for innovation.
Worldline strongly believes that PSD2 has the potential of significantly boosting the use of open APIs in European banking and that CAPS is the perfect framework for progressive banks who wants to monetize on their PSD2 investments and use PSD2 as a springboard for a digital transformation into the Open Banking space.
"Open access to bank accounts has the potential to lead to an explosion of innovation, competition and new services. New revenue streams will evolve and the banks themselves could even be one of the main beneficiaries from this dynamic environment - if they position themselves in a timely and proactive manner”
Finally, Worldline believes that the Nordic banks are very well positioned to cope with the compliance part of PSD2, but certainly also to go beyond compliance with the right strategic partners and become European front-runners within the Open Banking space - which Worldline strongly believes is the place to be if banks want to embrace innovation to stay relevant and grow their customer relationships and their businesses in the years to come.