PSD2 has long been established, but its European Union market reverberations are still generating challenges for banks and businesses that must comply. This only increased earlier this year with the implementation of strong customer authentication (SCA), which forced merchants to develop security solutions that would not impact sales and sent retailers scrambling to project how these changes would affect operations.
Unanswered authentication questions and regulatory confusion have not dampened PSD2’s attractiveness for regulators outside the EU, and Turkey is among the latest to adopt the standards. The second Payment Services Directive became effective for the country’s banks and other financial players on Jan. 1, 2020. Turkish financial institutions (FIs) have not exhibited the same signs of stress or confusion that other markets' institutions showed as the regulation rolled out, and many of the country’s payment players expressed support for the development.
Turkish banks will likely have an easier time supporting open banking and fighting off FinTechs, too, making them slightly more prepared for financial innovation than some of their European counterparts, Soner Canko, CEO of Turkish bank consortium Bankalararasi Kart Merkezi (BKM), noted in a recent interview with PYMNTS.
“The status of British banks is unfortunately awful … because they are still based on old technologies [like the] IBM mainframe, and they are not user-friendly technologies,” Canko said. “[These banks] are still using their conservative, old-school business models. This is almost the same in all of Europe — Germany is the same, and Italy and Spain. The Turkish market is totally different. All of the banks [have been] very innovative and very excited to use state-of-the-art technologies for almost 20 years.”
He added that Turkey’s “latecomer advantage” for consumer banking and PSD2 may have given its FIs and payment providers technological handholds that European institutions lacked when the regulation was first proposed. Turkish banks are ready and waiting for PSD2, a twist that may have intriguing effects on third-party providers’ and FinTechs’ futures, as they typically view PSD2 as an opportunity to muscle in on legacy banks’ turf.
FinTechs Struggle With Higher Standards
Turkey is in a unique position with its support of PSD2, Canko said, especially considering the market perception shifts that took place between now and the first iteration of open banking, PSD1, which Turkey implemented five years ago.
“In effect, the story of the open banking goes [back] almost 10 years, when we heard about [the] EU’s PSD1 regulations from our central bank,” Canko explained. “We were so surprised, because we are not a member of the EU, but our central bank decided to follow all of the EU regulations in terms of financial changes. We … did not understand what the government or the central bank was trying to do.”
The attitude toward PSD2 is different, he said. Banks are well-informed and well-supported, and this preparedness means the market’s FIs and payment services can approach compliance with more flexibility. They can also be more discerning regarding third-party companies and FinTechs.
Turkey will be implementing open banking by crafting application programming interfaces (APIs) that can link startups to banking data, he noted, but that innovation and flexibility means FinTechs might have a harder time finding a place in the market. He pointed to the U.K., which is saturated with challenger banks like Atom Bank and Monzo that provide faster, user-friendly services to British customers. Turkish institutions already have this handled.
“You can open your accounts [at Turkish banks] in several minutes, or you can [use] online banking through your phone or computer, and you can have your account open in one minute like you are dealing with a challenger bank,” Canko said. “That makes challenger banks or FinTechs’ missions very difficult in the Turkish market. It is a very competitive market, [but] that does not mean there is no space for FinTech companies, for challenger banks. There is [a place], but they need to find every niche in such an environment.”
One of the opportunities for potential third-party players will be account aggregation, he added, noting the average Turkish customer has three separate credit cards — each for a different aspect of his or her financial life. FinTechs that can consolidate these accounts will likely see greater success in the Turkish open banking ecosystem, he said.
The ease Turkish FIs exhibit regarding PSD2 does not overshadow some of the potential stumbling blocks, however. There are still undetermined aspects of its application, including the role and potential impact of SCA.
The SCA Questions Keep Coming
SCA may be one of the most challenging aspects of PSD2 in the EU because it puts merchants and banks opposite each other. FIs must comply with SCA, but merchants still need to make sales, and many have failed to find a happy medium.
“The consumer experience and consumer security [are] going to be the true [hurdles] I believe, because [these regulations] are very complex topics to understand from [both] the consumer’s point of view and the merchant’s point of view,” he said. “At the end of the day, merchants want to sell and consumers want to spend.”
Turkey has managed to escape this question thus far, as its status outside the EU means it does not need to incorporate SCA. Canko did note that Turkey’s financial authorities would likely be publishing drafts regarding SCA relatively soon, however.
SCA is not the only PSD2 problem Turkey will need to confront in the new year, and smaller challengers and FinTechs are not the only entities that typically view the regulation as an open-ended invitation into the market. Technology behemoths from both China and the U.S. — including Apple, Alibaba, Facebook, Google and Tencent — are looking to see how PSD2 could affect their opportunities in Turkey. Each comes with its own payment solutions that can threaten Turkish banking operations, but Canko said the Chinese players are the ones to watch.
“If you had to ask me [which player] is going to be the most agile and aggressive, Alipay and WeChat might be [the more] agile and quicker investors in the Turkish market,” he said. “Apple and Google Pay are [still] waiting for [regulatory] standards, but the Chinese players are not. They are moving like small fish. They are not [a] whale.”
It is too early to tell how such payment solutions will be received in the Turkish market under PSD2. What is clear, however, is that the complex, multilayered financial ecosystem PSD2 brings will not go away, and Turkish FinTechs will need to exceed the high innovation standards of local FIs if they want to compete.