One of the core components of the revised Payment Services Directive (PSD2) is permission for third party providers to access bank accounts for the purpose of account data aggregation. As a result, banks are required to deploy Application Programme Interfaces (APIs) that are openly accessible by these third parties.
There is some excitement around how this could impact FX. Disruptive technology consultant Sally Eaves expects FX to become increasingly important and for transparent cross-border transactions to become standard practice, followed by FX API access between continents.
In the meantime, FX brokers will be able to accelerate client registration from the start of next year when the directive comes into effect, assuming they get the appropriate permissions to becomepayment initiation service providers or account information service providers.
That is the view of Celent senior analyst, Gareth Lodge, who says there might even be other opportunities to speed up the process. “For example, the client may instruct just their broker going forward as the broker can request the funds from the bank. The point of PSD2 is to remove the banks’ control of the payments account.”
Brokers accept bank statements as a proof of address, so this approach makes sense. Gaining access to clients’ bank accounts will allow brokers to simplify and improve the know your customer (KYC) procedure as well as risk management and retention.
Stephen Lemon, VP of business development and co-founder of Currencycloud, describes this as intelligent use of PSD2. “However, we are assuming that regulators consider this approach acceptable. The challenge will lie in demonstrating that client data will be managed to the highest standards of security.”
Banks sitting on data treasure trove
Banks could become an amazing source of data at the moment of KYC checks if one considers that in most developed countries four or five banks own 95% of the market, and so most of the data, suggests Kantox CEO, Philippe Gelis.
According to Lemon, the potential for reviewing client assets to determine trading patterns is highly promising. “I know that certain FX brokers are excited about accessing data to see foreign receivables and/or regular foreign payments so they can establish a pattern in their client’s needs and activities,” he says.
This would enable brokers to be proactive in terms of suggesting optimum times to effect the FX transaction, or even automate the trade execution. In addition, it could also help brokers protect their business by allowing them to monitor their client’s financial history and therefore better manage risk.
There is also a significant possibility to automate a manual process, adds Lemon. “Brokers with good client relationships already receive details of their clients’ trading activity, but PSD2 will allow for a more integrated and automated solution. Brokers will be able to access client information within seconds, creating a ‘stickier’ relationship for the broker.”
He describes PSD2 as a helpful tool in retention processes. “If, for example, a user has been inactive for quite a while, with their consent the broker could use a banking API to scan all the client’s bank accounts to find the probable cause of inactivity,” says Lemon. “As a result, a broker could potentially motivate the client, encouraging them to resume trading.”
Lodge reckons there is potential in using client data for trading analysis. However, he also acknowledges that other regulations need to be considered — in particularthe General Data Protection Regulation (GDPR), which harmonizes data privacy laws across Europe and also comes into effect next year.
When asked to what extent the ability to check clients’ trading activity would give brokers a better idea of what might incentivize the client to increase their trading volumes, Lodge suggests that this would depend on the data contained within the remittance field (i.e. a narrative description of the trade); whether that data is supplied under PSD2; and whether the broker has the technology to extract and analyze that data.
Angus Clacher, head of operations at Caplin Systems, is more sceptical, suggesting that in the short term brokers will continue to use the KYC and identity tools they already employ to open accounts and that client trading behaviour will continue to provide a better source of information for trading patterns than bank accounts.
“Better client segmentation and improved understanding of clients’ needs has allowed enlightened FX providers to go beyond providing just the sharpest price or driving volume,” he concludes. “By understanding a client’s business and hedging needs they can provide much better products and get away from driving volume in low margin transactions.”