The impact of PSD2 : What are the challenges and potential solutions for established banks regarding FinTech companies and digital platforms?

Abstract

The European Union has revised the original Payment Service Directive1. The new Payment Service Directive 2(PSD2)forces the banks to implement Application Programming Interface (API), making it possible for third-party providersto gain access to the bank’scustomer datawithout approval (given the customer’s consent).The European financial market is quickly changing with new customer needs and new innovative technologies emerging from FinTech startups, targeting each part inthe value chain of traditional bank-service providers.PSD2 enhances the innovation of the financial industry, forcing banks to make a digital transformation of their business model. However, not everybody viewsFinTechcompaniesas a threat. Some view them as a challengebutwith an understanding that they couldbecome a potential partnerwith great opportunities.Some of the largest companies in the world, such as Alibaba, Alphabet (Googel), and Amazon are all based on a digital platform model.Such companies can all bepotential threats to the banking industry, where Facebook already has a banking license. We have found that many banks are reluctant to make changes in their business model. This is especially true for smaller savings banks. Larger banksare more aware of the need for a digital transformation and invest heavily in developing their business model.In this thesis we investigate the banks business modelsand suggest that the larger banks transform into a platform-based business model, while smaller banks should become niche banks by specializing in targeting particular customersegments.