White Paper



Digital Transformation Through PSD2 and Open Banking

By Seshika Fernando
Head of Financial Solutions, WSO2


1. Introduction

Banking as we know it is changing rapidly and industry players are looking for new and innovative ways to keep pace. Traditionally, the global financial services market has been oligopolistic in nature. When an oligopoly exists, those at the top define the market dynamics. They decide what services should be offered, the rate at which innovation should take place, and the consumer experience as well.

This, however, is changing at a rapid pace. Starting off with the regulations such as PSD2 in Europe and Open Banking, which are being adopted heavily, banks can no longer enjoy this favorable market position. This has lead to banks ramping up their product, technology, and customer strategies to stay relevant and compete better in an era of open banking.

2. PSD2: Why it started as a threat?

PSD2 requires banks to expose customer account and payment data to third-party providers with customer consent in a secure manner with an objective to create a better integrated financial ecosystem within the EU (Figure 1). It seeks to open up payment markets to new entrants, leading to increased competition, greater choice, and an overall improvement in customer lifestyles

Why it started as a threat

Figure 1

Initially, most European banks had their apprehensions about PSD2 It threatened to take away the sole ownership of customer data that banks enjoyed exclusively; this created a justifiable fear of the bank becoming a commodity to the new providers of innovative payment services such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). It also brought about the threat of increased competition and the need for banks to really step up their game if they were to retain customers and maintain loyalty.

3. PSD2: The Opportunity

PSD2 was meant to shake the dynamics of the banking industry and pave the way to a new model of open banking. Any bank that embraces PSD2 as a stepping stone to the world of digital banking (apart from considering it a compliance requirement) can reap the benefits of becoming more accustomed to serving data-driven customers. These banks will provide new digital products and services, thereby adding new revenue streams and capturing market share from banks that failed to embrace open banking.

We have identified five key areas that will be impacted by the new model of open banking and PSD2. The table below provides guidelines on how banks can transform the short-term implications of these key areas into long-term opportunities.

Area of Impact Short-Term Implication Long-Term Opportunity
1. Customer relationships Loss of unique customer ownership being detrimental to loyalty and engagement. Create more enhanced customer relationships by addressing the needs of the data driven and digitally motivated customer.
2. Business Model and Identity Disintermediation of financial services leading to banks no longer being sole service providers of banking. Create an ecosystem that enables banks to provide services beyond traditional banking.
3. Revenue Loss of revenue from payment transactions and subsequent loss of customer revenue. New revenue streams through digital initiatives, such as analytics driven insight, API monetization, and AISP and PISP services.
4. Competitive dynamics New entrants, such as Fintechs and AISP and PISP providers, taking over market share previously owned by banks. Collaboration with Fintechs to provide AISP and PISP services as part of an extended offering. Ability to consolidate customer and non-customer data across all banks.
5. Technology infrastructure Adapt capabilities to expose data via APIs in a secure and controlled manner. Build into a core business function supported by a fully fledged digital platform

4. Leveraging PSD2 to Enter the New World of Digital Banking

Digital banking creates a pathway for banks and financial institutions to collaborate with other service providers to offer products and services that offer unique digital experiences that transform customer lifestyles. Refer to our whitepaper to learn more about creating a customer-driven business opportunity through open banking. Figure 2 illustrates the typical journey of how a bank becomes digitally transformed through open banking.

Leveraging PSD2 to Enter the New World of Digital Banking

Figure 2

4.1 PSD2 compliance

The basic requirement for PSD2 compliance is the ability to expose customer account and payment data through APIs in a secure manner. The API management tool that banks employ for this purpose should not only be able to secure APIs, but also provide Strong Customer Authentication (SCA) and consent management capabilities in line with the Regulatory Technical Standards (RTS) of PSD2. Banks should ensure that the appropriate measures to provide a positive third-party provider experience are in place. Third parties play a key role in determining how effectively the open banking ecosystem works. Next, banks should be able to monitor API usage so they can identify monetizing opportunities. When a bank becomes PSD2 compliant, it takes the first and necessary step in becoming a digitally transformed organization.

4.2 Offering third-party services

A survey conducted by Accenture for banking consumers in UK and Ireland showed that a majority (76%) prefer traditional banks to assume the duties of third-party service providers (TPPs) as trust remains essential when handling sensitive banking information.

This provides banks with the perfect opportunity to retain and even attract a broader pool of customers via PISP and AISP services. While supporting third-party providers helps a bank’s customer gain better access to products and services, banks who become TPPs can provide all these services in a unified and seamless manner. Plus, it puts customers at ease because they rely on the bank for all their needs without relying on intermediaries.

Offering third-party services

Figure 3

4.3 Digital transformation

The digital transformation of a bank can be built upon the rich resource of consolidated financial information of all banking consumers within a banking ecosystem (e.g. the EU). Banks that offer AISP/PISP services gain access into this rich repository of consolidated financial information of its customers spread across multiple banks, obtaining a much deeper understanding of its customer base than was possible before. Additionally, such a bank also receives consolidated financial data about its non-customers, thereby gaining valuable insights into market segments that the bank can eventually tap into and expand its portfolio.

Apart from gaining deeper insights into the bank’s customers and noncustomers, the repository of customer financial data enables a bank to provide new products and services that will translate into new revenue streams for the respective bank. Refer to our whitepaper to learn how you can modernize existing legacy technology to adapt to open banking and digital banking needs.

4.4 Customer-centric services

When banks offer AISP and PISP services, it gains complete knowledge into a customer’s consolidated financials that include assets and liabilities across multiple banks. This can be leveraged to provide new services that allow the customer to better manage their lifestyles as well as cash flows. Following are a few such examples:

  • Upselling and cross selling products based on customer’s excess cash or forecasted credit shortfall obtained through current assets and liabilities and expected cash flows across multiple banks
  • Providing tools that enable managing cash flows and investments across multiple banks and thereby luring customers to continue relationship that would otherwise be lost to TPPs
  • Providing product recommendations based on deep customer knowledge, such as purchase trends and lifestyle patterns gained through customer payment information and consolidated account information

4.5 Business-centric services

The deep customer knowledge gained through consolidated customer financial information allows banks to analyze and aggregate data and provide business insights that are useful for other industries, such as retail, hospitality, transportation, telecommunication, and healthcare, among others. Banks can provide aggregate insights, such as trends, seasonalities, customer demographics, and even location analytics that help enterprises across different industries provide contextually relevant products and services to their clientele. This type of insights-based selling adds another new and lucrative revenue stream for the bank.

Apart from enabling the bank to reclaim lost loyalty, these new products and services help to add new revenue streams by going beyond traditional banking and becoming a lifestyle management partner to customers.

5. WSO2 Open Banking

WSO2 Open Banking is purpose-built for global open banking. It helps align banking and regulatory needs with technology infrastructure and domain expertise to fully satisfy the technology requirements for Open Banking. It provides a componentized architecture ensuring flexibility to meet different technology use cases. Built on top of a unified platform, WSO2 Open Banking helps banks extend open banking initiatives to API first digital initiatives.

5.1 What does WSO2 Open Banking offer?

PSD2 compliance

  • API templates that support Open Banking UK, The Berlin Group, and STET API specifications and Australian CDR
  • Built-in API Security including OAuth2 and certificate validation
  • Identity and access management that facilitates strong customer authentication and consent management
  • Transaction risk analysis and fraud detection
  • API analytics to monitor API usage and API monetization capabilities

Extending banking to offer PISP and AISP services

  • API integration to facilitate the integration of APIs from several third-party providers
  • Federated user authentication with trusted banks under disparate identity protocols
  • Fraud detection to detect and alert anomalies in payment initiation transactions
  • API specific and data specific dashboards that provide different views of the consolidated financial data

Digital transformation partnership for banking beyond the norm

  • Web and mobile app suite that enables customer-centric digital services
  • Insight sales application that provides capabilities to transform the customer data repository into business insights
  • Extensive analytics to collate data from various APIs and create products and services for insights-based selling
  • Platform capabilities to build complete technologies that seamlessly integrate with existing and new systems
  • A collaborative effort towards digital transformation that encapsulates all functions of an organization

If you would like to learn how WSO2 Open Banking can help your open banking journey and digitally transform your bank, please contact us.

6. Conclusion

While banks may face initial challenges in their efforts to be PSD2 compliant or implement open banking, it can offer greater business benefits in the long term. Therefore, banks must recognize the wider scope and consider this as a digital transformation led opportunity that supports collaboration, intelligent selling, and business expansion. Eventually, these efforts will translate to greater customer loyalty and retention than ever before.

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