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Banking May Lose 40% of Their Business

12 November 2017

Carlos Moedas believes that the new payment system, which will come into force as early as January, will provoke a revolution in services. The banking system as we know it is coming to an end

The banking system, as we know, it will disappear. In January 2018, the new payment services directive will come into force, which will put an end to the monopoly that banking institutions have on their clients’ financial information and payment services. Earlier this week, European Commissioner Carlos Moedas said that we are facing a “revolution” in bank payment services because it implies “changing paradigms and reducing costs.”

“Big companies will have to live with new players, which will take over a piece of the business. ‘FinTech’s’ are biting at the heels of the big banks, and that’s a good thing, “said former Secretary of State Passos Coelho.

This means that in less than two months any company provided it has the proper licensing and authorisation, will be able to access information customers’ bank accounts, without being subject to financial regulation.

The formula is simple: customers will be able to turn to service providers to manage their accounts. It will be possible, for example, to pay your electricity bill through Uber’s app or via Facebook. Another possibility will be to make purchases through an online platform, such as Amazon, and then choose whether you want to directly access your bank details to proceed with payment without going through other traditional brokers, such as Visa or PayPal.

This change will oblige banks to provide these potential new service providers with access to customer accounts through open APIs (Application Program Interface). And for customers with more than one bank account, the new policy will introduce the concept of Account Information Service Providers (AISP), which will enable consumers to access all their account information using just one portal.

This novelty may have an even more significant impact at a time when we are witnessing an open ‘war’ between banks in the Portuguese banking system over banking commissions.

The truth is that while there will be a much more extensive transfer of data between institutions – which could lead to fears about security breaches – the new directive also brings critical legislative changes to the protection of consumer data. This will require heightened verification of the buyer’s identity.

Banks will lose revenues

The consequences for the industry are already visible. According to Roland Berger’s consultants, the new directive will affect more than 1 billion bank customers and could affect between 25% and 40% of the operating income of banks in the European Union.

For the consultancy, the risks to the financial system do not stop there. They believe that banks “face a risk of losing their day-to-day relationship with customers by transferring financial management and payment services to online or mobile platforms of new entrants, which are not restricted by the existing banking infrastructure.”

They add that if the banks do nothing, “their role will be increasingly diminished.” Therefore, they should develop their aggregation and payment initiation solutions, which could be an opportunity for the sector, “or otherwise lose relevance”.

The governor of the Bank of Portugal (BdP) is of the same opinion, though he believes that the new rules will bring “business opportunities in a more innovative and competitive market.”

According to Carlos Costa, “there will be room for new entities that are not currently involved in the current payment system, a third entity that will position itself between the consumer and the banks. But the new system will only make sense if it brings reduced costs and added efficiency and safety compared to the current arrangement.”

Regarding the role of regulators in this new scenario, the governor limited himself to saying that it is up to them to ensure regulatory neutrality so that it is not “an obstacle to innovation, nor does it protect the incumbents (companies already in the market), while safeguarding limits to risks and ensuring security.”

Novo Banco reacts

The entity led by António Ramalho launched a new method for making payments this Saturday. NBChatPay will allow the user to transfer money to contacts on their phones using a chat application. “Available for customers with the NB smart app installed on the mobile phone, NBChatPay allows you to make small transfers immediately, without complications, in applications as varied as Messenger, WhatsApp, or even in SMS conversations”, Novo Banco revealed.

The new payments will work in conjunction with the MB WAY system and will allow users to transfer funds both to customers who use the system and people who do not.

SOL contacted the leading banks, and only CGD responded that “Caixa is in the process of training its employees to have direct contact with customers.”

When the directive comes into force in January, two types of operators will be regulated: the information aggregators, who compile the information on clients’ various bank accounts, after receiving authorisation, and offering a full spectrum service of personal finance management; and payment initiation operators, who would provide a payment service account for the account.

Though they have yet to come into force, the new rules will still be subject to some modifications, to approve technical regulatory standards on authentication and communications security.

Original Story: Sapo – Sónia Peres Pinto

Translation: Richard Turner