FinTech? TPP? Neobank? Europe’s financial services market has seen a surge of new entrants due to the Second Payment Services Directive (PSD2). According to data from Capgemini’s Open Banking Market Observatory, 345 PSD2-licensed third-party providers (TPPs) from 26 EU countries are currently operating in the open banking landscape, almost tripling since this same time last year. With around 10–15 new PSD2-licensed TPPs every month and over one million British consumers already using open banking, the market shows no sign of slowing down.
Under PSD2, TPPs can read their clients’ bank account transactions with an account information services (AIS) license, for example to give financial advice. Additionally, TPPs can initiate payments directly from their clients’ bank account with a payment initiation services (PIS) license, for example to make online payments. Naturally, a much wider range of services can be offered with this information, as shown in figure 2. The following guide explains the different types of PSD2 licensed TPPs and their value propositions in more detail.
The comprehensive guide to PSD2 value propositions
The majority of PSD2-licensed TPPs focus on account information services. Within money management, they offer services related to personal finance management (PFM), such as analyzing spending habits, managing recurring subscriptions, or aggregating multiple bank accounts into one app. Neobanks take this even one step further, by offering spending analytics in combination with a dedicated debit card and other services, such as favorable currency exchange rates and/or free ATM withdrawals. These digital challengers are disrupting the core of the financial services market and are rapidly gaining customers across Europe.
Within accounting and administration, TPPs service all kinds of businesses (SMEs, freelancers, corporates) with the automation of their accounting, invoicing, tax- and payroll administration, as well as some TPPs offering insights into cashflow or a dedicated business account to manage employee spending. Accounting is a necessary but time-consuming task, hence these TPPs aim to simplify the accounting process so companies can focus on their key business. Similarly, with over 4,500 banks in Europe – all obliged to build an application programming interface (API) for secure data sharing – a group of TPPs in API services has dedicated its service to establishing a platform where third parties can connect with bank APIs from across Europe. Without clear API standards, these TPPs have a unique “middleman” position as they offer extremely relevant services for both banks, fintechs, and more.
TPPs within lending and credit checks have taken full advantage of being able to read their clients’ bank account data by offering credit scoring solutions and providing personal and/or business loans to those in need of financing – often within 24 to 48 hours. By reading account data from multiple investing accounts, investment portfolios can be better managed. Using payment initiation, TPPs offer platforms for peer-to-peer loans or invest their clients’ digital change by rounding up online and in-store card purchases. Other TPPs aggregate multiple loyalty cards to use them for online/in-store payments – or offer personal offers to their clients based on spending behavior. Lastly, some TPPs offer ID and verification services, useful for performing strong customer authentication (SCA) on online transactions or reading bank account data to improve know your customer (KYC) for banks.
A smaller, more select group of TPPs primarily focuses on payment initiation services. With a growing ecommerce market in all regions of Europe, online transactions are also growing. Payment service providers are part of the online transaction ecosystem, as they offer a payment gateway for merchants where consumers can choose from a wide range of payment methods (e.g. iDeal, MasterCard, Visa, PayPal, Sofort). Even so, some TPPs are effectively looking to become such a payment method, leveraging low cost bank transfers under PSD2. Being able to directly transfer money from their clients’ bank account to a merchants’ bank account is becoming even more attractive for TPPs in combination with instant (online) payments, as well as at the point-of-sale (e.g., with QR code). A few TPPs focus on other payment-related services, for example cross-border transfers, cryptocurrency trading or the integration of WeChat Pay.
The next frontier
The open banking landscape is a market to watch for outside players, as Capgemini’s Open Banking Market Observatory indicates promising growth rates and over €6 billion in funding raised by PSD2-licensed TPPs already. By continuously tracking developments in the market, promising startups can be identified while new emerging value propositions are explored and investigated to look for competitive advantage in the current business. Especially for banks, mapping the own portfolio to that of the emerging PSD2 value propositions indicates how they compare to the market, if they are missing out on opportunities and whether they should develop such capabilities (e.g. on their own or by partnering with fintechs). To transform from a traditional bank towards becoming a financial information solutions provider, banks should be ruthlessly customer focused and understand the pain points of their clients. By developing solutions to address these pain points and linking them together into one ecosystem, banks can capitalize on the need for PSD2-like services.