roles for banks and payment operators. how the scenario ...roles for banks and payment operators....

www.pwc.ch

Roles for Banks and paymentoperators. How the scenario mightevolve in the future.

PSD2 in a nutshell

PwC | 2

The payments business, therefore, may prospectively be asubstantial source of revenues: it provides stable earnings, doesnot absorbe significant capital and constitutes a stock ofinformation regarding clients behaviour.

The global payments industry is growing, at an estimated rate of 5% and could reach about € 2,400 billion within the next 5 years1.

1'700 1'800 1'9002'100

2'400

0

500

1000

1500

2000

2500

3000

2013 2014 2015 2018 (E) 2020 (E)

€bi

llion

Revenues from global payments industry

CAGR+ 5%

Nevertheless, in the banking sector the margin from fees forPayment and Collection services only accounts for a smallportion of the total margin from fees (~10/15%)2.

So far leading players in this business have been operatorshandling large volumes able to take advantage ofeconomies of scale in order to offer payment services at anincreasingly low margin, enriching the range of their services withcomplex products concerning cash management, foreign currencytransactions and services to manage cross-border transactions (forexample, cash pooling). At the same time the payments market ofprivate or small operators is quite fragmented, dominated byoperators holding their client’s payment account and providingbanking and traditional services.

In this context, PSD2 and the combined impacts of otherregulations in the sector increase regulatory and com-petitive pressure within the payments market, contributing tothe reshaping of the scenario and creating opportunities for thedevelopment of new business models.Source: PwC analysis on public market data

1) PwC analysis on public market data2) PwC analysis on the financial statements of the leading banking groups

PSD2 in a nutshell | n.5

PSD2 in the payments market

PwC | 3

The introduction of PSD2 overturns an established EuropeanBanking market paradigm: the information on paymenttransactions, as well as on the account balance, will be accessible– at the request of the account holder – to external operatorsauthorised to operate as payment or electronic money institutions.

The regulations also introduces three new services:• payment initiation through a PISP – Payment Initiation

Service Provider;• consultation of the aggregate information regarding the

accounts held (account information) through an AISP –Account Information Service Provider;

• funds checking through a CISP – Card Issuer ServiceProvider.

These services will allow operators, intending to become paymentor electronic money institutions, to enable new businessmodels.

While, until now, a merchant can be paid during the purchaseprocess, initiated by the debtor, with a payment card or by fundtransfer, under PSD2 the beneficiary (a merchant /retailerqualifyied as third party or acting through an approved party) couldsend a request for payment, allowing the customer to pay directlyfrom their current account through the contact channels orinterfaces used for initiating the purchase (for example, a websiteor an e-commerce or service App).

PISP

AISP

CISP

The usergives

instructionsfor payment

The PISP initiatespayment

The payer’sBank

transfers the funds

The payee’sBank

receives the funds

The user accesses itsonline account and asksfor information from the

AISP

The AISP asks the Banksfor the information,

consolidates it and makes itavailable to the client

The client’sBanks provide the

information

The user givesinstructions for payment to the

merchant through a card issued by a Bank

and drawn on more than one account heldby the payer, even with

other Banks.

The CISP checkswhethercleared

funds are available

The payee’sBank asks the CISP whetherthe payer has

sufficientcleared funds

The payer’sBank

confirmswhether or not clearedfunds are available

The reshaping of the scenario and the entry of new operators


The entry of third parties (authorized to operate in the paymentsmarket) and the development of new services could lead tobypassing the payment interface, usually handled by the Bank orthe payment card provider, and to allowing the client experience tobe managed end-to-end by the retailer/operator that sells their ownproducts/services.

This explains why Over the Tops (for example, Facebook, Google,Amazon) are closing in on and are interested in the paymentsmarket: they want to both widen the range of their services and thepurchasing experience, and managed the end-to-end relationshipand collect data on client behaviour (an activity Banks have notperformed in an organised way so far).

This means that Banks and other payments market operators mustconsider the impact of disintermediation on the client loyaltyprocesses in the medium to long-term.

Banking and payment operators risk losing their roles asintermediaries with their clients and undo some of themarketing and technology investments made in this area.

In the end, competition among payments market operators willinvolve operators’ capacity to build new engagement andrelationship models with their clients with the aim of learning asmuch as they can about their needs and to structure a range ofproducts/services in line with them. The responses of Banks andcurrent payment operators on PSD2 depends on their aspirationto have a role in the payments market and on their capacityto invest in new business and technology solutions.

AS IS

The interfaces are managed directly by the

bank or provider of payment cards

Bank

TO BE

User

User interfaces may alsobe managed directly e2e by the retailer/operator

BankUser

PwC | 4

The risk of market operators disintermediation


PwC | 5

Before working out their strategical positioning, operators alreadyin the payments market (for example, Banks) should undertake ananalysis of the sector in order to:

• determine the margins produced by the sector and thecontribution it guarantees to the total business results(see the Case Study: Payments & Collections sectorrevenues);

• estimate the additional revenues which could begenerated by an advanced form of utilisation ofinformation on client behaviour (for example, Big Data,Advanced Analytics) to structure the offer of services thatadd value (including through TPPs);

• assess the concentration and distribution of the volumeamong the segments of clients and the related risksof PSD2 services offered by competitors;

• redefine and optimize the pricing models to adoptcompared to other players;

• evaluate the adaptability and flexibility of theapplications and architectures which make thebusiness work and the room for growth (in terms ofmanagement of volumes and process capacity);

• analyse the level of innovation to be brought into theoffer, possibly integrating other initiatives available in thepayments sector, such as SCT Inst, payment services forpublic authorities (for example, payment of fines,collections) and e-identity.

+2%

2016 2016 20162022 2022 2022

~30% fees

-16%

~15% fees 100% fees

- 5%

Case study: Payments & Collections sector revenues

The introduction of new services enabled by the Directive couldlead to a reduction of revenues, especially those within the e-money sector, resulting from new tools, such as those used fore-commerce purchases.

There may be an increase in the use of online transfers offunds to make up for the potential losses.In case Banks decide to follow the path of merely adjusting toregulations, a net revenue between -5% and -9% isexpected within the Payments & Collections sector in theshort and medium-term.

Source: PwC’s analysis

E-moneysector Transfers Net impact on total

fees

Analysing the sector …


PwC | 6

In order to make a decision on how to position themselvesstrategically, PwC suggests that payment market operatorsconsider, among other things, two main drivers for revenue raisingfrom fees in the payments business.Operators should consider, in particular:

• Development of value-added services: measure howmuch the operators invest in innovation and development oftheir business propositions in order to differentiate themselvesfrom the competitors, satisfying increasingly sophisticatedfinancial needs and other expectations, improving the userexperience and evolving their pricing model;

• Opening to and monetisation of data: operators shouldgauge their capacity to manage information, create openarchitectures (for example, open API) and extract value fromanalysing client behaviour. The more information isavailable on the customer base, the more it will bepossible to profile clients to anticipate their needs and createinnovative, digital business models and eventually developprocessing platforms able to extract value also for otheroperators/competitors.

• Benefits: compliance with regulations• Investments: operational compliance modifications

(ICT, security, processes, contracts)• Revenue model: unvaried without the benefit of

additional revenues from VAS, possibilemodifications to the pricing of payment products

• Benefits: expansion of the product catalogue,protection of the client base, new business ideas torespond to new needs, possibile collaborations/alliances with TPPs to retain clients

• Investments: compliance modifications, commercialinvestments for the development of new value-addedbanking services and functionalities, integration withthird parties

• Revenue model: new fee revenues from value-added services

• Benefits: open up to clients looking for a provider oftechnology and digital services, with processingcapacity

• Investments: compliance and IT infrastructuresecurity modifications, enhancement of technical andanalytics expertise

• Revenue model: offer of traditional banking servicesto clients, provision of technology services tocompetitors

• Benefits: acquisition of clients and offer of VAS,including not strictly banking services, collaborationwith TTPs in order to cover new clients and developinnovation

• Investments: compliance modifications, develop-ment of new banking services and VAS, ITinfrastructure, operational mechanism as a factory forthe market/competitors, development of digital skills

• Revenue model: new revenues (from fees andvolumes) from VAS, proceeds from collaboration withFinTech and TPPs with the possibility of providingtechnology services/products also to competitors

High

Low High

Valu

e-ad

ded

serv

ices

Opening to and monetisation of data

PwC View: possibile positions in the market in the new scenario

Source: PwC analysis

Compliantplayer

Platform

AggregatorAggregator as

a platform

… to see how operators can position themselves strategically


PwC | 7

Compliant player

Compliance is the minimum objective for all market operators.To pursue this choice, investments aimed to adjust procedures,processes and contracts with clients have to be made in order toopen up to the market and obtain access to back-office servicesfrom third-parties (or other Banks).

The services offered in the payments market will remainpredominantly aligned to the current situation, without thebenefits arising from additional revenues providing VAS. Thepush towards innovation generated by PSD2, the effects of othermarket standards and the aggressive strategies of new operatorscan put at risk part of the margin from payments.

According to the first surveys conducted on medium-sized Banks4

these institutions risk losing from 5% to 9% of their business,the exact proportion depending on the importance of theircorporate division and the share of business relating to e-moneyservices.

Aggregator

Operators acting as “Aggregators” integrate information andinitiate payment transactions on competitors’ currentaccounts.

The possibility of developing new services is an opportunity, inparticular for small and medium-sized Banks. to prepare a moresophisticated catalogue of services and secure theircustomer base.

Players which make this choice aim at making commercialinvestments in developing products and revenue models inaddition to their basic payment services (or based on them – forexample, payments to Public Authorities).

The choice of the service model to pursue may also entailpartnerships with third parties (for example, FinTech), whichmay reduce development and innovation costs and improve “go-to-market”.

4) PwC analysis conducted on clients over the period from 2014 to 2016H1

Compliantplayer

Platform

Aggregator

High

Low High

Aggregator as a platform

Vallu

e-ad

ded

serv

ices


Chose one role (1/2)

Compliantplayer

Platform

Aggregator

High

Low High


Valu

e-ad

ded

serv

ices



PwC | 8

Platform

This position assumes an investment capacity in IT infra-structures and Security in order to provide a compliantenvironment based on innovative architectural logics (for example,open API) which guarantee calculation and process skills with adecreasing “cost to serve” and exploits economies of scale.

Developing architectures that can also manage the informativecontents of payments, allows the operator to complementtraditional payment services with digital services, reaching adigital clients base and to widen their target also to other financialoperators and/or Banks (for example, development of B2Bservices: offering the technological environment to third parties,providing outsourced auditing and compliance services ordeveloping a product factory and services to other operators whichdo not have the expertise nor the funds to do so themselves).

Specific expertise in technology, security (for example,blockchain) and analytics is necessary for this position in themarket.


This role may be a target for operators that handle bigvolumes, have a substantial cross-sector customer base in themarket of reference (for instance, retail, corporate, publicadministration segments) and can take advantage of theircapacity of process and investments in technology andmarketing.

This allows them to enable access to their services also to smalleroperators looking for a performing payment engine with anarchitecture compliant with the regulation which supports thedevelopment of advanced products and pricing models.In this role, the benefits of direct collaboration/alliance withthird parties or other financial institutions are essential tosharing knowledge and innovative technologies.

Digital expertise is a critical success factor for the developmentof new products and services, starting from advanced analysisof client information (for example, Big Data, AdvancedAnalytics).

Compliantplayer

Platform

Aggregator

High

Low High


Valu

e-ad

ded

serv

ices


Compliantplayer

Platform

Aggregator

High

Low High


Valu

e-ad

ded

serv

ices


Chose one role (2/2)


PwC | 9

Each operator affected by the transformations in this scenario mustconduct a cost-opportunity analysis based on their size,investment capacity and risk appetite in order to determine theirpositioning in the short to medium/long-term.

The first step Banks need to take is being compliant withprocesses, procedures and infrastructure, and afterwards theanalysis must evolve into strategic and business objectives.

After the compliance modifications, small and medium-sized Banksmay make further commercial investments and enter intopartnerships/alliances with new market operators (for example,FinTech) in order to take advantage of their capacity and technicalknowledge, helping to develop new value-added andaggregation services. Larger Banks can aim at offering a widerand more digital range of services, allowing them to broaden theirtarget client base, encouraging them to migrate towards digitalchannels and more innovative and cost effective servicemodels.

Compliantplayer

Platform

Aggregator

High

Low High


Valu

e-ad

ded

serv

ices


Global Transaction Bank caseMedium-sized Bank case

Some possible positioning paths

Key


The paths to follow


PwC | 10

Depending on the strategic positioning the operator decides to adopt, it will be necessary to involve either partially or entirely some organisational structures in the change process.

The more the strategic objectives entailinvestments in commercial and mar-keting and ICT projects in order tosustain a competitive positioning withrespect to other operators, the morenecessary it will be to diversify theexpertise of the resources engagedand, above all, to assess the degree oftheir involvement.

It could be necessary to consider ac-quiring the knowledge and know-how needed to support the pathtowards the desired positioning on themarket and/or in other businesssectors.

Therefore it is important to see whichsuccess factors are critical toachieve the desired target objectives.

Organisationalfunctions

Compliantplayer Aggregator Platform Aggregator as

a platform

Compliance

Organisation/Processes

Sales

Marketing

Architectures

Security

Channels


Expertise

ChangeManagementInvestmentcapacityTime to Market

Key

orga

nisa

tiona

lfu

nctio

nsin

volv

edC

ritic

al s

ucce

ssFa

ctor

s

Low High

Consider the involvement of the organisational structures


PwC | 11

Traditional Banks may consider PSD2 as an opportunity torenew themselves and innovate, enlarging their customer baseand client proposition and creating new revenue streams.

The coming into force of PSD2 rules (13 January 2018), togetherwith the impacts of other sector legislation and the extent ofthe action needing to be planned, mean that decisions must betaken in the short term.

All operators, therefore, must consider the necessity of applyingminimum compliance modifications and of having clear medium-term objectives: the amount to set aside for investment,the target clients, the expected composition of the revenuemodel and, especially, the contribution that paymentsbusinesses, strategic for client engagement, can generate, in thePSD2 scenario.

Indeed, it is the knowledge of clients and the identification of theirneeds that is fundamental in determining their strategicposition: in fact, with detailed knowledge of the targets, operatorscan make the right decisions regarding the commercial propositionof innovative and digital services.

Risk of non-compliance and

impacts on image, client retention and

loss or revenue

Opportunity to develop new products and

partnerships with TTPs/FinTech,

increased market share and offer of

value-added products

Risks and opportunities


Birchstrasse 1608050 Zurich-Oerlikon

Tel: +41 58 792 14 97Mobil: +41 79 894 58 73E-mail: [email protected]

Günther DobrauzPartner, Leader Legal FS Regulatory & Compliance Services

Your Contacts



Michael TaschnerSenior Manager, Legal FS Regulatory & Compliance Services



Philipp RosenauerManager, Legal FS Regulatory & Compliance Services

Thank you for your attention!

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2017 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

roles for banks and payment operators. how the scenario ...roles for banks and payment operators....

Documents