In a newly published paper titled Preparing for PSD2: The Role of Data and the Future of Banking, Datastax examines challenges related to data and PSD2 compliance, explores different opportunities for banks to use data more effectively and delineates the role of data management at scale within customer experience and compliance management.
At this point, it almost goes without saying that the upcoming implementation of the revised Payments Services Directive, otherwise known as PSD2, will impact banking institutions across the entire financial services ecosystem. The new regulatory measures will open financial services and payments markets to an entirely new arena of competitors and service providers. PSD2 presents a unique opportunity to differentiate customer services by making use of both the internal data of financial institutions and external market indicators in real-time, and at scale.
In its new paper – Preparing for PSD2: The Role of Data and the Future of Banking – Datastax, a provider of enterprise data management solutions, argues that consolidation of data should be a prerequisite to managing PSD2 compliance. Scaled management of data, it posits, offers ideal circumstances to enable the IT teams of banks or other financial institutions to implement new cloud applications that better live up to increasingly demanding consumer experience expectations.
To achieve this, it is essential that banks have the ability to effectively consolidate data and interpret relationships between data elements in real time. Banks that lack this ability will undoubtedly struggle to implement new services that their customers consider valuable. Unsurprisingly, the threat of losing customers to the competition increases greatly for these un- or underprepared banks.
“Opening bank systems to third party access is a huge risk unless banks organise themselves to leverage data as a differentiator. Yet this is what they are being forced to do by PSD2. I strongly urge all banks to rise to this challenge or be subsumed by the new age competition of data differentiators.” – Chris Skinner, Chairman of the Financial Services Club & Author of The Finanser , ValueWeb , Digital Bank
The impact of PSD2 on banking
When the original Payments Services Directive (PSD) was created by the European Union in 2007, its aims were: updating Europe’s payments market to more competition, enabling better delivery of services to consumers, and making cross-border payments as efficient as those taking place in just one country. Consequently, PSD led to the development of the Single Euro Payments Area, a.k.a. SEPA.
In the meantime, countless new payment services and innovations have developed; the PSD2 addresses the changing landscape. Under the updated directive, financial services providers and banks will be compelled to adapt to a new market and infrastructure for payments.
The development of open banking and payments Application Programming Interfaces, or APIs, is especially relevant to new processes for routing information between customers, retailers, and banks. New third party providers will be able to enter the market around payment processing and information services.
To properly prepare for PSD2 and stand up to competition from incumbents as well as new market entrants, banks will need to focus on improving data management in order to better apply current customer-related insights going forward. This demands a consideration of the possibilities to use external and internal data sets together. With this in mind, Datastax has indicated six key questions to be addressed, as illustrated in the image below.
The future role of data in banking
Datastax argues that, for banks, the right approach to implementing the infrastructure needed to support API integrations and to making use of innovative data management techniques will largely depend on two things: the appetite for risk and innovation that exists within the bank, and the availability of budget to support projects that are in development. With these two items as a basis, Datastax proposes a method for qualifying the approach, and outlines four distinct types, as illustrated in the figure seen below.
Preparing for PSD2
In the final section of the paper, Datastax outlines detailed steps to prepare for PSD2, suggesting that one of the most important things banks will need to consider is how its applications and services might function via APIs. Although new applications that meet the new API standards can certainly be developed, any existing services will need to be updated to operate through an API layer, which will handle the request and then return back the necessary information to the customer or to the business requesting it.
Although PSD2 regulations stipulate that banks should have APIs in place for information sharing and the support of payments processing, it does not outline any specific instructions around how those APIs should be structured. Technical standards and concrete requirements are instead being defined locally. The report maintains that banking IT teams will be better suited to get ahead of the competition by refactoring applications and making use of the Open Banking Working Group (OBWG) API specifications as the interface between the app and the backend of the bank.
API layer deployment
The volume of transactions and interaction requests from customers is expected to be high for the API layer, and coping with this volume will likely compound existing challenges, as an under-resourced API management platform is a recipe for an unsatisfactory customer experience. Database, data streaming, and caching elements will likewise need to scale up in step with the API layer in order to minimise the potential for bottlenecks within the overall infrastructure. The paper identifies four key requirements for PSD2 infrastructure, namely:
- High availability • If there are any problems that develop in the infrastructure, then the service to customers should not be affected.
- Session Aware Load Balancing • If specific individual sessions are interrupted, then these should be picked up by other elements automatically and without the customer noticing.
- Servers and cache for data • This additional hardware supports the work being carried out, both in terms of processing and in near-line storage of data for performance.
- Database • This will create, sort and manage the records of each transaction over time.
It goes on to explain that, for compliance with PSD2, the infrastructure strategy should support the implementation of the API layer, but also ensure that the bank is able to scale its implementation in a manner that is cost effective over time. The most effective option reported to ease scaling is a distributed computing approach, because it only involves adding supplementary nodes to the infrastructure.
The paper further defends opting for this approach as a response to the infrastructure demands on the API layer by elaborating on the benefits it is able to provide, such as native, always-on architecture based on distributed computing models, a scale-out model, location of data, and database management. To further clarify and defend this recommendation, the section concludes by presenting an infographic (pictured below) that depicts an illustrated comparison of what PSD2 APIs might realistically look like when implemented on top of existing systems, versus PSD2 APIs that use an always-on scalable database.
To read or download (PDF) the Datastax white paper – Preparing for PSD2: The Role of Data and the Future of Banking – click here.