Recently a friend of mine, who works in insurance, told me that he just heard of the PSD2 Directive, and asked me if I knew what would it mean to them in the insurance business. I could not answer straight away, as I currently work in the bank sector and thus on the receiving end of the directive. Seeded by his interest I decided to sum up my ideas on the topic.
For those unfamiliar with the PSD2 abbreviation it is the second payment services directive released by the EU. As the name gives away it is about payment services and as such it doesn’t directly affect the insurance business. However it cannot be brushed off at that, as there will be deeper and more difficult challenges for them to face.
PSD2 mandates a few changes about payments, and focuses on redefining electronic payment. The most important aspects are:
- Mandated string account information and payment security
- Definition of new players Payment Initiation Service Providers (PISP) and Account Information and Service Providers (AISP)
- Opening up services currently not available to the players above through a well defined and published API
Some of the regulation requires further clarification, and there are questions to be answered about the way these are to be implemented. To make matters even more complex in the Hungarian context imlementation of PSD2 runs parallel with the Domestic Instant Payment initiative, that sets up a 5 second limit for fulfilling domestic payment transactions in local currency.
Both topics are widely discussed and there is plenty of material about it on the internet for those interested. However most of these discussions are about the effects of these changes for banks or the emerging fintechs who are to make use of said changes, their predicted impact is nothing short of a revolution for the entire financial industry. What I did not find quite so verbosely published are the impacts of these changes on the traditional service providers, such as the insurance companies.
So how do these changes affect a company providing insurance services?
Simply put it PSD2, as the name says it all, is about payments and has nothing to do with other types of finances, such as mortgages, loans, savings or insurance. Publishing services for anything else, than account information and payment transactions are therefore not mandated by the directive. So it’s safe to say, that not even the savings related life insurance methods are affected.
So I could say insurance companies are not affected at all, but I think that would be a gross oversimplification.
On the other hand the insurance company is on the receiving end of payments from its customers and as part of its standard core business, it is also supposed to make reimbursements and refunds to its customers. At the very least they should be able to receive and initiate money transfers through the digital channels provided by their bank.
Taking the changes a step further they should consider if it could be taken a step further. Why not reform the business model and become a PISP themselves? Then they would be able to cut out the middleman (card payments, postal cheques) and initiate customer payments straight away on their own mobile application or web portal. Customers would be able to link their bank accounts to their insurance, and would just receive a payment request to approve when their monthly payment is due. Or they can set up an automatic periodic payment without having to worry about using the currently not-at-all-user-friendly direct debit process that is slow and cumbersome. These are just to mention a few points. There are also payment services that are non-core business related, such as wages, rents and commissions that can also benefit from using the API-s directly.
The insurance business above is just an example of traditional business, that must consider stepping up in digitalization, but all businesses could consider their own position.There are lots of company specific opportunities that can only be discovered by analyzing the core processes of the individual company. It is best to revise the business processes staring from the core processes to see if they can benefit from using the new opportunities all the way to the supporting processes that involve payment.
My recommendation is to set up a suitable team of business process experts and product specialists to find the business cases that are subject to benefit from new digital channels. Companies should also initiate discussions with their respective banks to see the changes they plan to make in the digital channels.
For most companies PSD2 will not be mandatory but a great opportunity to get ahead of their competitors. It will not be a simple transformation and if one doesn’t want to fall behind they shoud start identifying their possibilities and start preparing for the coming changes.
(image courtesy of typennington.com)