Craig Ramsay works within treasury services at HSBC and spends his days looking three to five years in the future to find solutions HSBC can provide their corporate clients. He’s kind of a modern day banking fortune teller, and we were excited to sit down to get his insights on PSD2 and Open Banking.
We wanted to give some background on Open Banking & PSD2 to start off. PSD2 is a regulatory requirement superseding PSD1. Regulators want to give consumers the advantage of competition against banks in a way that allows Third Party Providers (TPPs), fintechs, or other players the opportunity to offer services that before were solely provided by banks.
There are two players that have come from the PSD2 environment that are servicing consumers, corporates, and banks:
- Account Information Service Providers (AISPs)
- Payments Information Service Providers (PISPs)
Account Information Service Providers (AISPs) are aggregating data so that consumers can see information across multiple banks. For example, HSBC recently launched their Connected Money app which allows consumers to see their account information across multiple banks and start making more informed decisions around savings, investments, and the like.
Payments Information Service Providers (PISPs) are creating a new payment scheme with bank-to-bank transfers. Today, corporates taking payments on a website or in a shop have to pay a certain percentage of the transaction to the schemes whether that be Mastercard or a digital method of payment like PayPal. A bank-to-bank transfer opens up an opportunity to save on merchant service charges because it will be cheaper for corporates to accept money from consumers.
Open Banking is ushering in better services, better capabilities, and better innovations. Large banks have to decide where they fit in the PSD2 landscape, and there has been a lot of focus around what banks are going to do to prepare for PSD2. But corporates also need to be thinking about how Open Banking & PSD2 is going to affect their business.
Throughout the webinar, Craig Ramsay brought up a plethora of questions corporate treasurers need to be asking themselves and actions they need to take in the ramp up to PSD2 and in the few years following. We broke them down here.
How can I take advantage of the ability to move money quickly between two bank accounts at a domestic level?
Looking across the world, Open Banking is not a phenomenon specific to Europe. In India they have launched a UPI payments scheme that enables bank-to-bank payments using a virtual address (usually a phone number). Australia is launching a bank-to-bank, real-time payment network in the next year. Canada, the United States, and Hong Kong are all talking about Open Banking. There are 17-20 countries globally that want to enable domestic bank exchanges in sub-five seconds on a real-time network. Corporations operating in multiple markets should be keenly interested in how they can benefit from the Open Banking movement spreading across the globe.
Do I have the flexibility and agility to build technical capabilities internally, or do I find a partner that will insulate me from the unknown?
There are a variety of unknowns and growing complexities around PSD2. One of them being the fact that there is not an API standard across all of Europe as the standards have been given at the country level. For banks and corporates, this opens up the opportunity to work with fintechs who have decided to take on the challenge of connecting all of these different systems using different standards and formats and do that mapping on behalf of banks and corporates. The relationship between Craig and ourselves over at Modo began around PSD2 because Modo manages that complexity between systems and standards on behalf of our clients. They connect to us once and we make them interoperable with all the systems to which they need to connect.
“Modo is all about managing complexity. And I think that’s where Modo has an interesting part to play in Europe in the coming months and years.”
There are other unknowns around PSD2: the nonfunctional requirements across all banking networks in Europe, how payment approval will be handled from a corporate perspective, how to create a better user experience around the two factor authentication requirement, how to manage partner registration, and the effect Brexit will have on PSD2.
Until the market stabilizes in Europe, corporate treasurers need to decide if they are going to work with a partner like Modo who can mitigate the risk of having to redo or redefine technical changes as they come or handle technical requirements internally.
What are the biggest opportunities for me in the Open Banking environment?
One of the primary responsibilities of a treasurer is to ensure they have the right amount of money, in the right place, at the right time. But currently the information available to treasurers is limited. The timing to receive information is different between banks and the ability to see multiple accounts in an aggregated manner hasn’t been possible. With Open Banking, treasurers will have access to their accounts at all of their banks with immediate connectivity through APIs. This will enable treasurers to make better and more informed decisions around consolidating and investing the corporate funds. Of course, the only bank information that will be available this way is within Europe, so corporates working in multiple markets will be limited by the availability of the information in other countries.
Open Banking is going to make predicting cash flow and forecasting easier for treasurers. If they have a better handle on how people are paying and when they’re paying, they should be better able to predict cash flow which will allow them to reduce float and release some cash to benefit the company. Additionally, aggregating data will enable cost savings by potentially choosing a different method of cash management services based on data accumulated by AISPs.
How will I handle the additional complexity created by additional systems for Open Banking?
The new bank-to-bank transfer method is not replacing cash, checks, debit cards, or credit cards. We’ll still have PayPal, and will likely have Alipay and WeChat as well. PSD2 is opening up bank-to-bank transfer as another way to accept money but will inherently come with additional complexity. Questions corporate treasurers need to be asking are: How do I integrate this new payment capability in the back office? How do I create straight through processing? How do I remove any issues around accounting and reconciliation? Partnering with a fintech, like Modo, that handles all the complexities of connections is one way to go.
A clear understanding of the long term goals of the corporation and the risk appetite with regards to Open Banking will help corporate treasurers make these decisions. If their risk appetite is low and they don’t fear disintermediation by other companies coming in and taking business away, they might be a follower and let the market settle. Partnering with a fintech or TPP is another alternative for them. If the corporation feels they can strategically take advantage of the regulations, they will have to be more aggressive and less risk sensitive.
With the right strategy, corporate treasurers should only succeed in Open Banking and PSD2. The regulators are opening up choice, improving interactions with consumers, and lowering the costs of banking services in the future. In order to spur more innovation and bring more value to consumers, PSD2 is something that needed to happen.
The path to success with PSD2 is not a clear and easy one, but nothing ever is. Craig summed it up best when he explained:
“I look at this as I’m looking at a long range weather forecast. I know I’ve got to go to the beach in October 2019. [As] I scan across my different channels, I have anything from it's going to be a heat wave and sunny to it’s going to be a tsunami. If you’re directly impacted by making a living off the beach, you've got to look at the forecast and figure out what you’re going to do whether it's sunny or tsunami because there are very different ways of looking at it. But if you’re like me I’m going to get to the beach, I’m going to sit in my deck chair, hawaiian shirt, cocktail, sunglasses, and I’m going to make the best of Open Banking because that’s what the regulators want us to do. I look forward to hopefully finding some equal people sat on the beach smiling and hopefully finding its not a tsunami.”
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