The Payment Services Directive: why our big banks need to learn to share
The banking world is about to undergo one of the biggest shake-ups since the invention of the cheque book. The new Payment Services Directive (PSD2), known colloquially as the “open banking” directive, will oblige financial institutions to open up their IT infrastructure via APIs and to allow their competitors access to the information that they have long-guarded jealously: their customer records.
Unsurprisingly, the large banks have not expressed delight at the prospect of a new law designed specifically to end their monopoly, but for those who can master the technical and security challenges that come with it, the directive could also present a huge opportunity.
A banker’s bad dream?
At first glance, PSD2 seems to represent a big bank’s worst nightmare. Its aim is to provide customers with far greater choice, including the ability to access banking services from a wide range of organisations. These include the new breed of nimble fintech start-ups and challenger banks from Monzo to Metro Bank, but also retail giants such as Amazon and Ebay.
No longer can a bank insist that customers use its own mobile services; nor will a customer need to log on to three different sites in order to gain a complete view of their finances. And one of the sector’s core income streams, retail payments, will be hit hard: according to Accenture, banks stand to lose a breath-taking 43% of their payment processing revenue by 2020.
Further challenges face the banks in terms of data management and security. Many are running on the same IT systems that have been in place for the past twenty years or more. Mergers and acquisitions have brought in vast quantities of customer information that may well still be held in separate databases.
Not only must all this information be secure yet shareable, but from May 2018 it must also comply with the EU General Data Protection Regulation, which additionally gives customers the “right to be forgotten.” Organisations that aren’t fully on top of their customer data will be in trouble.
According to a study from Blancco Technology Group in May of this year, 12% of corporate IT professionals in the UK admitted that they don’t know where all their customer data is stored, so there is work to be done.
Banks sitting on a gold mine
In spite of these challenges, however, the opportunities for the banking sector are enormous. Personal data is the new gold – Facebook, which has been the pioneer in this area, reported an operating margin of 47.2 per cent in its second quarter this year. And banks have mountains of the stuff.
They hold information not only about customer names, addresses and other demographic details, but frequently also mortgages, weddings and funerals. It is here that the opportunity lies
They hold information not only about customer names, addresses and other demographic details, but frequently also a lifetime of detail about every pound that an individual has spent, including mortgages, weddings and funerals. It is here that the opportunity lies.
Unlocking the value of this data is where the new fintech organisations excel. They have been built to meet the needs of today’s customers and to adapt to changing market demands and fierce competition. The banks, on the other hand, with a monopolistic position in the market and with heavy regulation, have adhered to a relatively conservative and unchanging model of business.
It is this that needs to change. Some have at last begun to analyse customer behaviour to identify trends and to offer targeted products, but banking is still way behind other sectors, such as traditional retail, in this regard.
Co-operating with the competition
Banks need to take a deep breath and embrace these new organisations as they stand waiting in the wings, eyeing customer banking data hungrily. The expertise of the fintechs in terms of technology, innovation and flexibility will be invaluable.
There are already signs that a rapprochement between the banks and the fintechs is beginning to happen
Rather than attempting to place barriers to API access, banks will have to work collaboratively with these organisations to offer the new digital services that customers want. In doing so they will be able to improve loyalty, but they will also be able to find ways to monetise the data that they hold.
Monetising the API licensing process itself will be a key factor in recuperating the revenue streams lost to competitors. PSD2 is not specific about the standards that need to be in place for open APIs, so the responsibility lies with the banks to devise a workable model with the fintech community that provides access through a structure of licence fees.
There are already signs that a rapprochement between the banks and the fintechs is beginning to happen. In addition to the open banking directive, the decision to leave the EU has brought the different players in the sector closer together. Barclays, HSBC and Lloyds, for example, are among more than 20 financial institutions to put their name to a recent industry drive to support fintech startups in the UK.
This willingness to co-operate looks set to go a step further in the near future. Two recent reports, from law firm Simmons and Simmons and from management consultancy PWC respectively, indicate that banks are considering investing more directly in the fintech world.
Some 31 per cent of financial services firms surveyed by Simmons and Simmons revealed that they had plans to buy another firm, while PWC’s findings went a step further, suggesting that half of the big banks are poised to buy a fintech startup.
Open minds, open APIs
The banks still have a long way to go. Gaining complete control of decades-worth of customer data will not be accomplished easily, particularly while ensuring compliance with a long list of stringent regulations. And for banks to adopt a more open mind-set, as well as open APIs, will take time.
If they can achieve both of these things, however, the new world of personal finance will be an exciting one. Consumers can look forward to greater flexibility, choice, and control over their own money. Banks, along with their new fintech partners, will reap the rewards of a greater understanding of what their customers want, and a new-found ability to deliver just that.
Author | Richard Whomes, director sales engineering at Rocket Software