Press Release

Madrid, 29th May 2020

Traditional banking has had to adapt to survive and live alongside digital banking, which brings new working methods and services that drive profitability, competition and improved customer service

One of the sector’s priority challenges is developing an appropriate collaboration strategy with the big techs that have arrived on the new financial scene

Technology has done nothing less than shake the very foundations of the financial sector, and the last 20 years, the industry has completely changed. The golden age of holding and lending money, with little competition, has gone. In its place, is an era of decay, where businesses are having to reinvent themselves in order to survive. Traditional banking hasn’t had it easy over this period, having to deal with the 2008 recession, make wholesale organisational changes and create hybrid business models to meet the demands of an ever more digital society. 

In just the last decade in Spain, traditional banks have seen more than 60% of their branches disappear. And in 2020, more than a thousand more branches are predicted to close, with their staff disappearing along with them. Whether because of their opening hours or speed of service, amongst other things, branches are becoming obsolete in favour of more convenient ways of banking.

However, instead of sitting back arms folded, the banking industry has undertaken its own digital journey and hasn’t looked back. According to Antonio García Rouco, managing director of GDS Modellica, “The digital transformation has stopped being an option and has instead become a means to improve efficiency to survive and establish a position in a new financial ecosystem, where new business models have emerged and new players have arrived who, in the beginning, were seen as a threat. The unexpected entrance of fintechs, Big Techs, multi-nationals and giants from other sectors (GAFA) who began providing financial services, represents stiff competition which is strengthened by being more agile and providing more flexibility and alternatives. The appearance of fintech companies has forced the traditional financial sector to embrace the digital transformation, otherwise, traditional banks would be relegated to a second tier or simply disappear”. Traditional banking, therefore, has had to renew itself and find its place to survive. The landscape is now very complex, where the digital revolution is fully underway and increasingly more people are banking using their mobile devices, putting the very existence of branches into question. “There are banks that already operate using mobile phones or the internet without human intervention in the operations that machines do, using complex algorithms that are capable of deciding whether or not to give someone a credit card, under what conditions and limits, with the aim of preventing potential fraud”, says García Rouco. “This is the trend. I don’t think the traditional bank is going to disappear, but it’s true that the digital bank is taking on a greater share of the work because of the speed that the market demands”.

GDS Modellica is conscious of the new needs of the sector and has developed flexible solutions to help financial businesses create, manage and improve strategies in a quicker, more convenient and more personalised way. They’re able to do this whilst maintaining compliance within a strict regulatory environment and helping to accelerate the sales cycle, adapting it to both the supply of loans and loan proposals, all with maximum levels of security. In the words of García Rouco: “We’re facing a change in the cycle in terms of digital transformation and also generation. If you want to be competitive on the market, you need to be agile in your decision-making, innovative and know how to adapt to new technologies.”

Ultimately, traditional banks have had to adapt to new consumer habits, adopt new ways of working, such as multi-channel, offer new exclusive services which boost and promote competition and provide better customer service. As a result, the sector has reacted by accelerating the digital transformation, launching new products and digital services. But banks have also learnt an important lesson – that rivalry with FinTechs makes no sense. Fintechs no longer behave like competitors. Instead, banks should look for new ways to collaborate to find the best way to create value. The current challenge for banking is, therefore, to come up with the right strategy to face up to the big techs which have arrived on the scene. Efficiency and flexibility are more important than ever for risk management, combatting fraud and creating profitable relationships with customers. “At GDS Modellica”, explains García Ruoco, “thanks to our solid experience in the banking sector, we’ve developed new techniques with an agile analytical approach which aims to improve risk management practices, create value and ensure a solid return on investment when implementing analytics and technology”.

Last but not least, in this new environment, the sheer volume of online transactions makes it vital to prevent risks and threats and guarantee the security of financial systems and banking in general. This means working against the clock to comply with regulations and update security systems in the fight against fraud and cyberattacks in a sector which is constantly evolving. Whilst initially fraudsters focused on hacking banking systems, as prevention technology adapts and improves, they are now diverting their attention towards the customer, a much simpler, more vulnerable target.

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Press Release

Madrid, 25th May 2020

PSD2 obliges banking institutions to harmonise electronic payment systems in the eurozone through Open Banking

It will strengthen the security of transactions by reinforcing security measures for identifying and authenticating users

The European Payment Services Directive, better known as PSD2, which came into force on 14 September 2019, updates the current PSD which regulated the payment services market in the eurozone and which had become obsolete due to emergence of new operators, making its renewal more than necessary.

The purpose of this new legislation is to guarantee online payments as well as prevent fraud by establishing requirements for its application. Financial institutions are obliged to open their payment services to third parties who are authorised by users. These third parties are external payment providers, known as TPP (Third Party Providers), and PSD2 establishes two different types: The PISP (Payment Initiation Service Providers), which enable payment by direct bank transfer where before you could only use a card, and the AISP (Account Information Service Providers), which collect and store account information so that users can have all their bank details in one place.

          This legislation, according to Antonio García Rouco, managing director of GDS Modellica, “will oblige financial institutions to work as an open bank – Open Banking. They will be obliged to give third parties access to customer accounts with the aim of harmonising payment services in the eurozone.” He went on to say, “It aims to strengthen the security of transactions, encourage innovation in the financial sector, improve the customer experience and demand the sector to change its security methods and access to data and transactions”.

There are two key themes to this new legislation; The first is the sharing of information, liberating users’ financial data and prior authorisation to use such data to encourage competition in the sector. The second is improved security of transactions by implementing reinforced security when identifying and authenticating users who make payments with the aim of guaranteeing and boosting competition, thereby adding value. The legislation also aims to improve payment security and efficiency, provide greater consumer protection, strengthen European payment services by standardising the regulations of different EU countries and continue with innovation and adaptation to new technologies in the financial sector.

This new regulatory framework provides many benefits to the development of the electronic payment market in the European Union. It increases competition in the sector, with new players offering users more choice and competitive prices, whilst also strengthening the security of operations with double authentication to reduce fraud and make transactions safer.

According to GDS Modellica, the application of this new payment legislation opens a wide range of possibilities in the financial sector by helping to create a more integrated European payment market, which is more secure and protects consumers. It directly affects financial institutions, and for this reason, they will need to make changes to their security and methods of accessing data with regards to opening their infrastructure, Open Banking and the improvement of security.

In this context, with the aim of aiding the digital transformation in the financial sector and enabling the arrival of new competitors in accordance with the new payment legislation (PSD2), GDS Modellica supplies software, decision analysis and automated machine learning techniques for managing risk, combatting fraud and building profitable relationships between businesses and customers. With respect to the management of specific risks in the finance industry, their solutions help to steer development and implement actions, applying solutions that are adapted to individual needs. In keeping with this last point, the managing director of the company says, “at  GDS Modellica, we offer an improved experience for clients through our careful attention to their needs coupled with our broad customer experience as industry leaders. Our tools can be personalised to offer complete solutions and completely optimise their current applications with the necessary components.”

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The words “do one thing every day that scares you” are regularly yet mistakenly attributed to Eleanor Roosevelt, the first lady of the United States from 1933 to 1945. In reality, the line comes from a 1997 essay by Mary Schmich, a columnist for the Chicago Tribune. The quote was part of a broader reflection on worries about the future, something which has been front and centre as a result of the COVID-19 pandemic. In fact, despite being written over two decades ago, her thoughts could not be more relevant: “Don’t worry about the future. Or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubble gum. The real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 p.m. on some idle Tuesday. Do one thing every day that scares you.”

As well as perfectly describing the historic moment that we’re going through (who would have worried three months ago about a global pandemic that would cause the worst crisis since the Second World Way?), Schmich’s words seem to have been taken as a guide for today’s financial institutions. Far from being scared of disruption, they’re increasingly embracing innovative projects and incorporating them in their “new normal”.

The open banking platform Tink has recently published data from a survey of 290 senior executives and decision-makers in financial institutions across 12 European countries. It’s a significant number of quality profiles, and the results show that a real shift has occurred. Almost two-thirds (61%) of financial institutions in Europe are feeling positive about open banking, which is up by 6 percentage points compared to the results from last year’s survey.

In addition, over half (52%) of those surveyed say they feel more positive about open banking than they did last year, and the number of decision-makers who claimed to feel more negative is a negligible 1%.

That said, this positive attitude doesn’t mean that organisations are going to suddenly benefit from the changes and innovations that come from open banking. In fact, according to the report’s authors, many institutions suffer from the lack of a clear strategy to realise the full benefits.

These claims haven’t just come out of thin air. According to the survey, almost half of those surveyed (46%) don’t believe that the benefits would be widely understood within their organisation, and a similar percentage (42%) don’t believe that their organisation has a clear strategy to realise those benefits.

In the opinion of Tink co-founder and CEO, Daniel Kjellén, there is a fragmented view in the industry. Some see open banking as a purely PSD2 compliance issue whilst others see it as a “long-term strategic play that involves a significant shift in their business model over time”. And both mentalities run the risk of “missing out on the open banking business boost”.

“For savvy and nimble institutions who look beyond compliance and can innovate fast, there is a huge opportunity for short-term, quick-win value creation through open banking. By behaving more like third party providers (TPPs) and making the most of APIs already on the market, institutions can reap the immediate benefits, creating improved products and services and enhancing customer experience”. The ones who take the headlines from this survey are the British financial institutions, who have shown themselves on average to be more receptive than their European “colleagues” (inverted commas owing to Brexit), to the extent that three quarters (74%) feel positive about open banking. According to Tink, this in large part due to the fact that the country has been “a pioneer” since the Competition and Markets Authority (CMA) issued an order in 2017 to open up the market and boost competition in financial services.

 

Spain takes second place in the rankings, where 69% of decision-makers feel more positive than a year ago. This is considerably higher than the European average (52%) and certainly way above countries like the Netherlands, where that level of enthusiasm remains at a meagre 30%.

Spain is also the stand-out leader when asked if they believed there was a clear strategy to benefit from the open banking surge. Nearly 8 of every 10 surveyed (79.3%) believed there was, against a European average of 57.6% and much more than the Finns and Danes, who sit at the bottom of the table with 40% each.

However, it’s not all good news for Spain since they lag behind Italy and Portugal when it comes to partnerships between financial institutions and fintech companies. Just 17.2% responded in the affirmative, compared with a European average of 22.4% and the two leading countries of Belgium (38.1%) and, once again, the United Kingdom (33.3%).

Therefore, for Spain, it’s time to incentivise these partnerships to truly release their potential, especially in the current situation. The country has the right attitude and plenty of enthusiasm, and this shouldn’t be impeded, not even by worries about the future, because worrying is as effective as trying to solve an algebra equation by chewing bubble gum.

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With the whole economy migrating towards digital services at an increasing pace, there is a lot of attention on the industry’s ability to adapt to the current situation. This is an unforeseen acceleration of changes that were just starting in recent years, and because of confinement measures across the planet, they are now becoming a necessity.

In sectors like banking, this violent shock comes coincides with new movements and regulations like IFRS9, PSD2 and Open Banking, which came about precisely to address the need for financial institutions and the business environment to adapt to the demands of a highly digitalised society.

As a result, the debate is becoming ever more interesting about who will take the lead in the industry. Will it be the traditional bank, new, more agile banking organisations, fintech start-ups or the group of businesses known as Big Techs? Or will it be some mixture of all of these?

“The world of banking is facing significant disruption as consumers demand increasingly sophisticated digital products”, writes Ellen Daniel, reporter at Verdict, a website specialising in business, technology and innovation. She writers that, in the present scenario, the Big Techs, also known as GAFA (Google, Amazon, Facebook, Apple), are looking to make “massive inroads” into banking.

In her report, Daniel quotes James Buckley, head of Finacle Europe, the banking division of Infosys, and an authority on the subject. In his opinion, “the big players that are sitting out there, sort of around the edge of financial services at the moment, I think will start moving in a much more systemic way”. It’s an enticing prospect for these businesses as it provides them the opportunity to play an even larger role in the lives of users, as well as unlock valuable insights from their spending habits.

The “GAFA” companies aren’t conventional banks, but they are waiting to make massive inroads using Open Banking APIs, and there are definitely opportunities if we look at the following consumer opinions:

  • – According to the lending specialists Pepper Money, 82% of UK consumers believe that “banks are not innovating fast enough”.
  • – Even more importantly, according to a survey of 18 to 35-year-olds by MuleSoft, half (52%) of those surveyed would consider using banking products from either Google, Amazon, Facebook or Apple.
  •  

On the flip side of the coin, a recent article at ITWeb entitled Banks can become the next big tech looks at the complete opposite focus, claiming that “banks are already part of the big tech movement”. What’s most interesting about this article is not so much what it says but who is saying it. If it had appeared on a banking industry website and was written by someone from the sector, it could easily be simply a “corporate” response to pressure from Big Tech. But it actually appears on a technology website, and the article is written by Kumar Utpal, Regional Sales Manager for Banking and Insurance, IN2IT Technologies.

“Innovation means change, which explains why banking always seems to be in a state of turmoil”, claims Utpal. “In reality, that is the price one pays for being an early adopter. Banks are early adopters out of necessity. When bitcoin arrived, the banks didn’t hide. They held conferences, created development teams and became part of the conversation.”

“We don’t think about it today”, he adds, “but much of the connected world today exists because of the efforts of banks. Transferring money instantly, conducting safe online sales, and making customers feel safe in the digital world are all innovations spearheaded by the financial sector. Banks are continually investing in new technologies, to the point that today technology sits at their core”.

Despite this, Utpal writes that banks seem to be “lagging”, and this is mainly down to their complexity and the range of different services. To tackle this, he suggests three specific actions:

  • 1 – Encourage a culture of experimentation and change through specific business units.
  • 2 – Collaborate more with fintechs as a way of focusing on what our modern times require.
  • 3 – Relax some of their procurement mechanisms for technology and new players: “An agile culture needs agile procurement”.

Is there any other option beyond the Big Techs and the big banks? In a recent article for Strategy+Business, Roman Laurence and Simon Westcott, managers at PwC UK, see the opportunity for new businesses and those traditional banks that know how to use them as a vehicle for transformation.

Both are absolutely clear that the greatest challenge for banking today comes from the GAFA companies and their huge capacity for introducing technology and new functionalities. “These rapid shifts”, they say, “may seem daunting to traditional banks and a challenge to the credit-approval processes that have emerged through decades of deliberate, methodical product design. The good news is that they need not face them alone. In many cases, the best approach will involve working with other providers”.

Such collaborative arrangements should focus on three key areas:

  • 1- ID verification services, which “ideally” are recognised across multiple jurisdictions.
  • 2 – Shared payment solutions to overcome their individual lack of scale.
  • 3 – Balance-sheet and risk-management functions-as-a-service to fintechs, and then to all technology companies.

“Given the headwinds confronting the consumer banking sector, the type of deep transformation we are describing may sound daunting. But as risky as it may seem, a bigger risk emerges if banks choose to stay on their current course, which would mean surrendering their role in the digital economy — and their relevance”, they conclude.

None of this is anything new. It’s the classic “adapt or die” situation. All that’s left is to choose which one of the two paths to take, perhaps faster than originally planned, since there’s no strategy for dealing with the consequences of a global pandemic.

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Published in ECONOMIST & JURIST

Madrid, 4 de Mayo 2020

The European Payment Services Directive, better known as PSD2, which entered into force on 14 September 2019, replaced the original PSD from 2009 which regulated the electronic payments market in the euro-zone. With the emergence of new operators, this directive had become obsolete and needed to be updated.

The aim of this new legislation is to guarantee online payments and prevent fraud. Financial organisations are required to open up their payment services to third parties who are authorised by users. These third parties are external payment providers, known as TPPs (Third Party Providers), and the PSD2 established two different types: PISP (Payment Initiation Service Providers), who enable payments by bank transfer where previously they could only be made by card, and AISP (Account Information Service Providers), who gather users’ account information so that users can access all their banking data through a single provider.

There are two key components to this new legislation: The first is the sharing of information by freeing users’ financial data with their prior authorisation to increase competition in the sector. The second is improved transaction security by implementing more robust methods for identifying and authenticating users who make payments with the aim of guaranteeing and boosting competition, creating added value. It furthermore aims to improve payment security and efficiency, provide increased consumer protection, strengthen the European payment market by standardising regulations between the different EU countries, and continue to promote innovation and adaptation to new technologies by the financial sector.

This new regulatory framework provides many advantages for the development of the electronic payment market in the EU. It increases competition in the sector, with new operators offering users greater choice and competitive prices, and strengthens the security of operations with double authentication. The aim is to reduce fraud and make transactions more secure. From the countless advantages for the consumer, the following are worth highlighting:

Greater information and transparency. The user will know all expenses associated with each transaction, as well as their status and timeframe for execution, with no added cost.

Ease of cancellation for any operation without the need for prior notice, unless agreed otherwise. This facility will not be free if the contract between the user and the provider is for less than six months.

– Rectification of unauthorised operations as soon as the user becomes aware of them. The user has the right to request a refund and, in the case of discrepancies, it will be the payment provider who needs to demonstrate that an operation has been carried out correctly, in accordance with banking security legislation, and that they have the necessary authorisation.

Limited liability when the user is the victim of fraud, with a customer liability of €50 instead of the previous amount of €150.

Reduced fraud and increased banking security through the implementation of stronger authentication measures, using at least two of the following three methods: inherent measures, such as fingerprint, iris or face recognition; a physical reference such as a card, digital certificate or a mobile phone; and thirdly, known information, such as a PIN or password.

At GDS Modellica, we understand that the arrival of this new payment legislation opens up a wide range of possibilities in the financial sector, helping to create a more integrated European payment market, make payments as secure as possible and protect consumers. It directly affects banking organisations and, as a consequence, they need to make changes to their data access methods regarding Open Banking, opening up their infrastructure and improving security. As a result of all this, we have launched our own 100% digital solution for the onboarding process which allows payment providers to carry out the process from start to finish, ensuring two-way communication with the customer via an alternative channel which uses the latest natural language processing technology with artificial intelligence.
The main priority of this new legislation is security. With this in mind, at GDS Modellica, we provide intelligent platforms, advanced analytics and machine learning techniques that help to manage risk, combat fraud and build worthwhile relationships between businesses and their customers through strategies which are tailored to individual needs.

The banking sector is using Open Banking technology to analyse the importance of data and make use of commercial strategies and opportunities. The technology is a fundamental part of purchasing financial products and services remotely, using greater connectivity to gather and transfer data, a more comprehensive Internet of Things and the convergence between fixed and mobile technologies. Looking specifically at this sector, this will lead to the definitive roll-out of virtual assistants, as well as an increase in communication security through the use of technologies such as Blockchain or Machine Learning.

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The coronavirus pandemic has completely changed the economic circumstances that we find ourselves in. In fact, there are so many headlines warning about the coming apocalypse that we at GDS Modellica think it’s a good idea to try to instil some calm and, as much as possible, look for reasons to be optimistic. Few sectors other than the financial sector can truly attest to the maxim that ‘where there is crisis, there is opportunity’. And today, we want to tell you why we think this is the case.

There is more opportunity than ever before for those industry players who have already been putting pressure on the market with more flexible, efficient and convenient business models for consumers. In some of our more recent posts, such as “A decade to rethink the banking industry” or “Advantages that PSD2 brings for the consumer, we started looking at some of these innovative ideas. Far from slowing down, the COVID-19 crisis has actually accelerated the disruption of traditional models. Today, there is a larger playing field than ever, and it’s not that we should be celebrating the pandemic but fairly appreciating the more positive consequences that it could have.

Clear advantages, hidden advantages

The executive editor of The Financial Brand, Steve Cocheo, has diagnosed the situation fairly accurately in a recent article about direct banks, which he claims are the clear “winners”. 

“Up until early March”, explains Cocheo, “direct banking was a growing corner of the banking business”. Growing, yes, but a corner, nonetheless. A “niche business” which basically offered mobile and online financial services, generally, without any branches. These new businesses knew how to transform that “weakness” into a strength by offering high-yield savings accounts, precisely because the savings of not having branches could be passed on to consumers.

“Then COVID-19 came along”, says Cocheo. “Suddenly direct banking found itself centre stage, not for its favourable rates, but for its ideal fit with a socially separating world.” Direct banks had a clear advantage in the eyes of the customer. But there was also another hidden advantage, an advantage which suddenly became a necessity for thousands of customers: being able to operate remotely and effectively.

According to Bob Neuhaus, VP of Financial Services Intelligence at JD Power, these businesses “have shown that there is a branchless model that has high levels of satisfaction and trust”. He claims that “direct banking used to be a niche business, but now it’s the new model for banking,”.

The exceptional thing will be the speed of change

Something else affected by the current situation are venture capital investments and business angels in Fintechs. At first glance, the big headline is the predictable decline at all levels of the sector. But beyond this, what we’re really seeing is a “cleansing” in the private Fintech bubble, something which was going to happen anyway sooner or later. The pandemic has simply brought forward an event which was already largely expected.

A report from the brokerage firm Rosenblatt Securities claims that the expected capital losses amongst the 58 largest Fintech unicorns could be around $76 billion. Expressed as a percentage, we’re talking about a market cap decline of some 15%. But regardless of how scary this might look, it’s simply the acceleration of a recession that was already on its way.

Rosenblatt suggests that these firms could be at greater risk than other firms because their multi-billion dollar valuations are dependent on strong assumptions regarding their expected future performance, revenue and exit potential, which will now be called into question due to the coronavirus pandemic. But furthermore, this means that “unicorns with negative unit economics and high cash burn will likely have to rethink and restructure”. The exceptional thing will not be that they have to do this but the speed at which they have to do it.

Vulnerabilities and re-education

Lastly, we think that it’s appropriate to touch on the implications for consumers, who are ultimately the raison d’être for the banking market, and any other market for that matter. Looking at this, the financial consultants MX have produced a recent study on financial behaviour and spending amidst the COVID-19 whirlwind.

The report, which is presented as an infographic, looks specifically at the United States market. Whilst it’s not completely possible to extrapolate conclusions for other regions (or even other western markets), there are elements which turn out to be similar to the consumer experience in other developed countries. The analysis looks at the current challenging situation and flags up where consumers are most vulnerable.

For example, 70% of Americans live “paycheck to paycheck”, and 3 in 10 have no emergency savings at all. According to MX, “At a time when we’re all taking precautionary measures towards recovery, most people are feeling the economic effects”.

However, the digital opportunity again reappears: “As people start to prioritize their savings and reassess their spending, we’re seeing a spike in digital trends. At a time when people are unable to visit physical branch locations, digital is the only alternative to keep them in the know about their finances. MX data shows a 50% increase in digital engagement with mobile banking apps since December. This makes sense considering banking is one of the most important parts of people’s lives, and perhaps, even more so right now”

The truth is that, with the data from the survey that they have carried out, to talk of “savings” is almost unthinkable. Half of those surveyed say that they can’t save because they don’t earn enough, and 60% say that their primary financial institution doesn’t help them. In broad sections of the population, the percentage of people who manage the stay within their monthly budget is really small: 20% of Millennials and 25% of Baby Boomers.

This data is worrying, but it’s worrying regardless of whether we’re facing a pandemic or not. The pandemic has simply made the situation visible and encouraged solutions which would need to be adopted at some point in any case. To address this, MX includes a “60-day Action Plan” which includes basic measures, such as being strict with your monthly budget, and less common measures like sharing bank account access with your partner.

Alongside predictable conservative measures, such as minimising unnecessary expenses or deferring payments, there are also positive, necessary steps and, as we said at the beginning of this article, there is the need to stay calm. “This is a hard time for everyone, but it’s also a great opportunity to lean in and help where you can. One way of doing this is by shopping locally. If you have available funds, help local businesses that may be struggling during the economic downturn. Another way is by helping your community, whether that’s by giving blood, or supporting regional food banks”.

These are uncertain times. But where this is crisis, there is opportunity – for business models, investments and behaviour. Despite the hardship, we will certainly learn something from this experience.

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press release

Madrid, 4 de Mayo 2020

This dictionary aims to help payment service customers, financial organisations and payment service suppliers better understand the main concepts so that they can make informed decisions.
The new payment services directive, known as PSD2, contains a lot of new terms and concepts. Some of them can be difficult for customers and financial organisations to get their heads around, and the language can sometimes be quite convoluted, leading to doubts or a lack of understanding. As a result, at GDS Modellica, we’ve put together a dictionary of the main concepts to help anyone involved in electronic payment services to better understand them and, that way, make better decisions.
This dictionary contains the essential terms relating to payment services in alphabetical order. We’ve aimed to explain these terms as clearly as possible with simple definitions, using words that everyone can understand.

Account Information Service: an online service providing consolidated information about one or more payment accounts held by the user with either another payment service provider or with multiple providers.

Account Information Service Provider: a payment service provider engaged in account information services.

Authentication: a procedure which allows the payment service provider to verify the identity of a payment service user or validate the use of a specific payment instrument, including the use of the user’s personalised security credentials.

Digital Content: any goods, service or product supplied in digital form, the use or consumption of which is restricted to a technical device and which doesn’t include the use or consumption of physical goods or services.

Payee: a natural or legal person who is the intended recipient of funds which are subject to a payment transaction.

Payer: a natural or legal person who holds a payment account and authorises a payment from that account, or, where there is no payment account, a natural or legal person who makes a payment order.

Payment Account: an account held in the name of one or more payment service users which is used to make payment transactions.

Payment Initiation Service: a procedure to initiate a payment order at the request of the user which relates to a payment account held with another payment service provider.

an account held in the name of one or more payment service users which is used to make payment transactions.

Payment Institution: a legal person that has been authorised by the relevant entity in accordance with Article 11 of the directive to provide and execute payment services throughout the European Union.

Payment Instrument: a personalised device or set of procedures agreed between the payment service user and the payment service provider.

Payment Order: an instruction by a payer or payee to their payment service provider requesting that a payment transaction be made.

Payment Service: any business activities which carry out payment services such as, for example: enabling cash to be deposited in or withdrawn from a payment account, the execution of payment transactions, execution of payment transactions where the funds are covered by credit, issuing of payment instruments, money remittance, payment initiation services and account information services.

Payment Service Provider: a body or entity established in Article 1, Paragraph 1, such as credit organisations, electronic money organisations, postal giro institutions, the European Central Bank, as well as the member states and natural or legal persons benefiting from an exemption pursuant to Article 32 or 33.

Payment System: a funds transfer system regulated by standardised arrangements with common rules for processing, clearing or settling payment transactions.

Payment Transaction: an action initiated by the payer or on their behalf or by the payee, to deposit, transfer or withdraw funds, irrespective of any underlying obligations between the payer and the payee.

Personalised Security Credentials: personalised features provided to the user by the payment service provider for the purposes of authentication.

Payment Service User: a natural or legal person who uses a payment service, whether as a payer, payee or both.

Remote Payment Transaction: a payment transaction initiated online or using a device that can be used for distance communication.

Sensitive Payment Data: any data, including personalised security credentials, which could be used to carry out fraud. The name of the account holder and account number do not constitute sensitive payment data.

Strong Customer Authentication: authentication using two or more elements categorised as knowledge (something only the user knows), possession (something only the user possesses) and inherence (something the user is) with the aim of protecting the confidentiality of authentication data.

Unique Identifier: a combination of letters, numbers and symbols provided to the user by the payment service provider to be able to unambiguously identify another payment service user and/or the payment account of that other user for a payment transaction.

This brief dictionary is a basic tool so that payment service customers, financial organisations or service providers can fully understand all the key concepts in PSD2. This way, they can make more informed decisions about the right products for them or the ones that they are most interested in, with no associated unknown risks. The key to making good decisions is to have as much information as possible – and the simpler it is, the better.

In our last post, we looked at the key points from Deloitte’s recent study entitled “2020 Banking and Capital Markets Outlook”, and we promised that we’d go into further detail in a later post. So, given its importance for such a fundamental and strategic sector, in this post, we’ll dive deeper into their analysis.

It’s worth pointing out that, obviously, all these predictions were valid before the global crisis caused by the COVID-19 pandemic. They’re still valid as far as they mark the road ahead in normal conditions, although ‘normal conditions’ are doubtlessly something which will be hugely shaken in the next few months.

The complexity of regulating a global market

One of the challenges facing the sector is how to deal with ever-increasing globalisation alongside diverging regulatory standards. This challenge doesn’t just relate to the different interests on a local, regional or continental level but also to the matters that it should address, whose priorities will vary in different places around the world: accounting regulations, data privacy and protection, transparency in access to information, cybersecurity, interbank rates, stress tests, etc.

Added to this is the pressure from new players on the market. “As fintechs become mainstream, the issue of how best to regulate them has become more urgent”, claim the authors. “On one hand, incumbents and fintechs want the latitude to experiment and innovate without the weight of stifling regulation. On the other, innovators also want a degree of regulatory certainty to ensure that their investments will pay off over the long run”.

They go on to conclude, “Amid global regulatory fragmentation, financial institutions – especially those with large global operations – are under significant pressure to reconcile local jurisdiction demands and their home country regulations. Smaller institutions are also not immune to these regulatory ebbs and flows. With divergence expected to continue, coupled with some geopolitical instability and the possibility of an economic downturn, banks can best prepare by continuing their compliance modernization journey using the latest governance, risk, and compliance technologies.”

Gaps, the human side and corporate culture

Whether we like it or not, we’re now in the middle of a period of digital transformation, and for banking, this involves matters such as data management, infrastructure modernisation, the adoption of artificial intelligence (AI) and migration to the cloud. But not everyone is moving at the same pace. North American companies are dedicating of their IT budgets to new technologies whilst their European counterparts are only allocating a quarter. This difference creates an incremental gap which will only be more difficult to reduce as time goes on.

On this matter, the authors claim that “2020 could be the year of “build and migrate”” and that the adoption of artificial intelligence is more profitable when implemented holistically across the organisation. They go on to say that, in order to make the most of this potential, it’s particularly necessary to “rethink their data architecture” if they truly want to transform from a product-centric to a customer-first organisation.

To this, we need to add the human side and corporate culture, which are non-negotiable aspects of the digital transformation. “More often than not, the success or failure of a digital transformation effort may depend on cultural issues rather than technical ones. Only those financial institutions that build a collaborative and innovative culture to drive change can achieve real returns on their technology investments in the next decade.” They could use more words, but they couldn’t say it any clearer.

Committing to technology

A maxim that is often attributed to Einstein says that you can’t keep doing things the same way and expect different results. When talking about banking, we’re talking about risks, both financial risks, which are internal, and non-financial risks, which are external but still have a big impact. The next decade will put to the test the industry’s capacity to continue modernising its risk management practices.

But if an organisation wants to succeed, they need to start by eliminating siloed and redundant risk management practices, which are inefficient both in terms of cost and process, so that the first line can take on more responsibilities. The next step would be to make true use of new technology that “helps banks reshape their risk management program in more meaningful ways”. This means looking at robotic process automation (RPA) and machine learning coupled with natural language processing, amongst others.

However, it’s important to be mindful that new technologies can also create new risks as a result of third-party relationships which could potentially expose banks to misuse of information, theft, system failures, business disruption or regulatory noncompliance.

All of this means putting an end to the historic proliferation of disparate legacy systems which have limited the ability to capture, measure and report data. Quality data can only come from enhancing data architecture.

New players, platforms and a broader range of services

We end this journey through the Deloitte report with a matter which definitely demands our attention: retail banking. The behaviour of this subsector in the last few years has been interesting, to say the least: minimal or negative interest rates, growth in deposits and consumer debt and, at the same time, a constant reduction in the number of banks and branches.

Aside from commercial changes, banks are now looking to create a “customer experience”, and this is something which is resisted despite the growth in the use of digital channels. Amongst other reasons, this is because of the emergence of non-banking organisations that are capturing a large market share, such as Quicken Loans, which is the largest mortgage originator in the United States. Similar things are happening in Asia with fintechs now becoming the dominant players, and in places like Australia, the United Kingdom and the European Union, open banking is becoming ever stronger.

The authors speculate that, by the end of the decade, “fewer retail banks might exist”. “As a result, the nature and degree of competition will likely change; the surviving fintechs should become mainstream players and traditional incumbents will recalibrate their strategies.” It’s not at all crazy to see banks and third parties teaming up to create dominant platforms in the ecosystem with an ever-broader range of services.

 

It is expected that product innovations will focus on clients’ financial well-being and closely connect lending, payment and wealth management services, creating a superior customer experience, greater connectivity and an ecosystem of APIs to offer contextual “advice” in real time, whilst protecting critical factors like privacy.

In any case, for 2020, which has started so shakily due to the COVID-19 pandemic, the initial expectations that open banking will strengthen, which could “amplify and accelerate banks’ digital transformation efforts and the emergence of new business models”. “While the potential upside is vast, the stakes are high”, so it’s also about being “selective” in how they implement open banking practices.

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The crisis brought about by the global coronavirus emergency is the perfect demonstration of the fact that any predictions that we might make about the future will be subject to numerous factors over which we have little to no control. But, if we set aside those things which are difficult to foresee, the business world still follows patterns which allow us to make some more or less accurate projections.

One such detailed projection has just been published by the consultancy firm Deloitte. It’s entitled “2020 banking and capital markets outlook”, and it consists of a detailed study of the evolution of these markets in recent years along with reasonable predictions for the future, addressing a number of different aspects:

1.

Riding the next wave of disruption

2.

Regulations: Complex as ever

3.

Technology: Fixing the basics

4.

Risk: Leveraging technology to elevate risk management

5.

Talent: Focusing on the human side of transformation

6.

Retail banking: Platforms are the future

7.

Payments: Remaining relevant as further disruption looms

8.

Wealth management: The new core of the banking relationship

9.

Investment banking: More pain before any gain

10.

Transaction banking: Need for bold change

11.

Corporate banking: Enhancing value streams beyond lending

12.

Market infrastructure: The ongoing search for a new identity

13.

A deeper dive

As you can see, it’s an intense summary for a no less in-depth study about what the banking sector and capital markets can expect in the years to come. In this post, we’re going to focus on the first of these sections, but we’ll delve in the others in later posts.

According to the study’s authors, “A new wave of disruption more forceful and more pervasive than what we have seen in recent years will likely unfold in the next decade.”

This warning hasn’t been plucked out of thin air. It comes from the foreseeable convergence of the factors which have so far established “the roots” of this disruption, such as technology, the economy, global politics, demographics or environmental factors. This convergence “should unleash unprecedented change in the broader society and economy, and, consequently, in the banking industry as well.”

However, there is a predominant driving factor for this disruption – the role of technology. In this disruption, we’ll see increasing fusion between current technologies, such as machine learning and blockchain, and emerging technologies, like quantum computing. This will generate new opportunities, new risks and “radically change work as we know it, as well as who is doing the work, and where it gets done.”

At the macroeconomic level, experts at Deloitte predict a “Japanification” for many advanced countries, particularly in Europe – persistent low growth combined with low inflation and near-zero or negative interest rates. To this, they add the “fundamental demographic changes” as a result of ageing populations in both advanced economies and emerging countries like China.

One final but no less important implication for the banking sector are the concerns about climate change and social impact, something which, like it or not, will oblige banks to reprioritise their role in society and sacrifice short-term gains for long-term sustainability.

The combination of all these things “could result in a drastic reduction in banking capacity, with fewer banks than we have today able to recover their cost of equity”, and the consequences aren’t far from the core of what GDS Modellica is all about: “These forces can also change how banking is done. Banking should become more open, transparent, real-time, intelligent, tailored, secure, seamless, and deeply integrated into consumers’ lives and institutional clients’ operations.”

For those who might see this as somewhat apocalyptic, there is an additional message: it’s the banking sector that should change, not the role of banks. Competitive advantages allow them to “remain trusted custodians of customers’ assets”, even when they have to assume new functions like protecting digital identities. This is true even if they probably will have to change their purpose, “placing themselves at the forefront of tackling large socio-economic issues, such as climate change or social equity.”

Success, as always, will be in the hands of those who know how to get ahead of the game and put themselves in dominant positions early on to address the new reality: “Instead of shying away from change, leaders should imagine the possibilities for how best to ride this wave of disruption”, conclude the authors.

It’s not possible to predict the unpredictable, whether logically or linguistically. But we can take note of market changes in order to anticipate the challenges, at least in a normal context. This is the context in which we need to understand these projections, and this is the context in which GDS Modellica is most at home: providing intelligence to the sector to help create market leaders in the short-to-medium term.

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press release

Madrid, 13th March 2020

The new Payment Services Directive strengthens security for users and protects against fraud
It reduces fraud and improves banking security through the implementation of more robust authentication measures
The new Payment Services Directive, PSD2, which entered into force in September 2019, aims to increase security levels for online and in-store payments, as well as allowing users to access more practical, innovative and cost-effective solutions offered by service providers. In the words of GDS Modellica managing director, Antonio García Rouco, “it increases consumer trust by strengthening security for users and protecting them against fraud and associated risks, in particular online fraud. It also improves the conversion rate by incorporating a greater number of payments because customers are able to find different ways of making reliable payments, generating greater certainty and customer security”.
This new regulatory framework provides many benefits for the electronic payment market. In particular, the benefits for the consumer include:

1

Greater information and transparency. The user will know all expenses associated with each transaction, as well as their status and timeframe for execution, with no added cost.

2

Ease of cancellation for any operation without the need for prior notice, unless agreed otherwise. This facility will not be free if the contract between the user and the provider is for less than six months.

3

Rectification of unauthorised operations as soon as the user becomes aware of them. The user has the right to request a refund and, in the case of discrepancies, it will be the payment provider who needs to demonstrate that an operation has been carried out correctly, in accordance with banking security legislation, and that they have the necessary authorisation.

4

Limited liability when the user is the victim of fraud, with a customer liability of €50 instead of the previous amount of €150.

5

Reduced fraud and increased banking security through the implementation of stronger authentication measures, using at least two of the following three methods: inherent measures, such as fingerprint, iris or face recognition; a physical reference such as a card, digital certificate or a mobile phone; and thirdly, known information, such as a PIN or password.

The main priority of this new legislation is security. With this in mind, and with the aim of offering measures for protecting data as much as money, GDS Modellica is a provider of software, decision analysis and machine learning techniques for managing risk, combating fraud and building worthwhile relationships between businesses and their customers. Their solutions for managing risks specific to the banking industry help to guide development and implement actions by applying solutions that are tailored to individual needs. This way, adds García Rouco, “with our technological capabilities, they can simplify daily operations and enjoy a more satisfactory user experience, including with the application of SCA (Strong Customer Authentication).”

Open banking, which is part of the payment directive, reduces the number of operators involved in a transaction, increases transparency and notably improves the user experience, encouraging fairer competition and identifying and addressing risks and fraud with greater ease and urgency. The work of GDS Modellica is essential, according to the managing director, “because we offer an improved customer experience through careful attention to their needs coupled with our own broad experience as industry leaders. Our tools can be tailored to offer complete solutions and completely optimise current applications and improve risk prevention with the necessary components.”

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