PSD2 and consumer credit
How the analysis of banking data enables small and medium lenders to run more efficient processes
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Open banking and the Second Payment Service Directive (PSD2) are reshaping the market of financial services in Europe. PSD2 enables consumers to share their financial data with third parties who offer them a service based on these data. On the one hand, this has the benefit of putting people - not their bank - in control of their financial data. On the other hand, PSD2 creates new business models for companies that are able to leverage financial data to offer valuable services for the users.
The financial industry turns into an Open Data industry. This transformation has an impact on every segment of it, from financial advice based on data, personalised tips on how to save money to a tailor-made pension scheme. In this article we focus on the effects of PSD2 for the consumer finance industry, especially for small and medium players.
A sector struggling with low profitability
The sector of consumer finance has seen hard times in the last years. Low interest rates have translated into slimmer margins for companies that lend money to retail consumers. Furthermore, the added value of lending products tends not to differ tremendously from one to the other. This means players usually have to pump in generous amounts of marketing money to acquire new customers.
The combined effect of low interest rates and high acquisition costs increases the threshold of profitable loans.
Lastly, the profitability of the consumer credit industry is positively influenced by having access to a large market and being able to offer a diversified range of products (Anderloni, Vandone 2010). This explains why small and medium lending companies have been the ones who suffered the most from squeezed profits, with many being forced out of the market.
The transition to automatisation
Open banking provides a new opportunity especially for the small and medium lenders to reduce their costs and be competitive. Among the new services enabled by PSD2, there are also more efficient back office processes. Nowadays, when you apply for a loan, a credit card or a mortgage, you typically have to supply a certain amount of documents supporting the fact that you’ll be able to repay your debt. Collecting these documents is a hurdle for the consumer and reviewing them is a costly process for the financial institution. PSD2 enables many of these data to be retrieved and reviewed digitally, lowering these hurdles.
When applying for a loan, users can consent to create a connection with their bank. This will enable the lending company to have access to the payment history, select those data that are relevant to assess the request (salary, rent, mortgage, subsidies, etc.) and give the consumer an immediate response. The payment history can also be used to perform affordability checks, income verification, KYC - all in a near instant way.
An application process that typically takes one or more weeks to be processed will then be immediately answered to the applicant.
By leveraging PSD2, companies can offer an easy on-boarding process to their users, who can provide the information they are usually asked to prove just with a simple click during their application.
Buy or build?
Behind the curtains, this kind of process requires the ability to collect the data and make sense out of them. Furthermore, operating in the PSD2 space requires a license. For the financial players it’s a “buy-or-build” decision. Some large players in Europe are funding companies that offer this solution as SaaS. It’s the case of the Dutch ING, ABN Amro or the Swedish SEB. Some of these SaaS companies are more focused on the aggregation of data, others serve the whole vertical, including the business logic on top of the data analysis. At the other end of the spectrum, small companies may decide to fully outsource these functions.
Outsourcing PSD2-enabled services to SaaS providers is likely to grant innovative lenders an advantage over the competitors. Whole parts of costly and labour intensive back office processes may be supplied by technology, enabling also SMEs to leverage the economies of scale. The clear advantage is to make the business more profitable for many of these companies. In turn, an increased profitability, will help many smaller companies to be competitive on the market. This will foster innovation and increase the offer for the end consumer.
Federico Spiezia, director at Bittiq
Govert van de Visch, senior manager at Deloitte NL