By Christian Ball, Head of Retail – Atlantic Region
Incumbent banks face the prospect of operating in a more competitive environment with the introduction of the Payment Services Directive (PSD2) in January 2018. EU regulators want to increase competition, improve customer service, and promote the development of online and mobile payment systems.
The key feature of the directive is that banks provide Third Party Providers (TPPs) access to customer online accounts / payment services through open APIs (Application Programming Interface) when account holders provide consent. This will allow third parties described as Payment Initiation Service Providers (PISPs) to directly access customer accounts by connecting directly through a standard API.
PSD2 is a further development towards Open Banking. In the UK the Competition and Markets Authority (CMA) published a report in 2016 advocating greater competition and reforms, with retail banks required to implement Open Banking by early 2018.
The banking landscape continues to be disrupted by new mobile only banks such as Atom Bank, Starling and Monzo who are attracting digitally savvy consumers. Non-bank service providers such as PayPal and Google Wallet are also eating into the market share of incumbents. For these new entrants, PSD2 is an opportunity to provide new innovative services. It can mean developing apps that provide customers with enhanced insight into their spending habits and products; along with services that will allow them to manage their financial affairs and make decisions that fit their lifestyles.
PSD2 has raised concerns amongst incumbents who are fearful about future profits and customer relations. Banks have been lobbying in Brussels to get some of the requirements of PSD2 watered down but attitudes are changing. The fear that they will be disintermediated by new challengers is receding as incumbents of all sizes begin to recognise that PSD2 and Open Banking present both threats and opportunities. Banks are beginning to explore new opportunities to monetise APIs as well as develop new financial products and services through data analysis and insight.
This drive to increase competition and to encourage new market participants is accelerating the adoption of Open Banking. Open Banking will create an environment of networks which require banks to adopt a platform strategy, forcing them to open up their technology to fintech firms and other financial service providers. How incumbents respond to this challenge will shape their own future.
The availability of APIs to third party developers will provide access to the business functions of an institution’s core systems. This will allow them to build next-generation products on top of a bank’s existing infrastructure – enabling them to create new services and tools for customers.
Rather than provide all the services that a bank does, PSD2 allows new challengers to provide specialist financial services more efficiently and cost effectively. Incumbents will need to consider which services they can still deliver competitively but Open banking also provides the chance to offer a selection of APIs to third parties in a similar way in which apps are presented on smartphones.
New business opportunities exist if incumbents can make their APIs available and understandable to third party developers. Data is at the heart of this development. By providing data through their APIs, new tailored services can be delivered to bank customers to specifically meet their needs. Examples include the development of new apps which allow customers to aggregate different financial information in ways that previously have not been available to them.
Open Banking will potentially transform the relationship between banks and their customers, with power shifting from the traditional bank to the customer. With this development, incumbents need to reconsider how they create value and it will require banks to adopt a more customer centric and data centric view on how they do business.
The new challenger banks and fintechs are providing incumbents with the best examples on how technology and data can support and enhance the customer experience in Open Banking.
A common strategy is for banks to partner or purchase startups and fintechs. Spain’s second largest bank BBVA are at the forefront of fintech acquisition and digital transformation. They are a major shareholder with British startup bank Atom Bank. They have also acquired Holvi, a Finnish based API based fintech innovator who specialise in small business payments. In 2014, BBVA purchased US based fintech Simple which uses APIs to help customers analyse their financial activity.
BBVA has been leading the way by exposing a range of its APIs to approved developers. Their APIs include, Customer profile data, key account data, money transfer services, and aggregated card purchase data. In Germany, Fidor Bank is not only a digital bank but also an innovative digital banking platform, providing an API enabled platform for third party developers and other market entrants wishing to offer bank services.
For incumbents seeking guidance, opening up APIs requires having an appropriate API strategy and governance in place. This will allow them to confidently open up their core data so that it can be utilised by other parts of their business and by third parties. The speed of execution for such strategies and governance will vary depending upon the organisation.
To fully embrace Open Banking, incumbents must move beyond the current mind-set of merely complying with PSD2. The regulation is more than just compliance – at its heart is the aim to increase competition. Open Banking is an opportunity to deliver an improved customer service and experience and at the same time represents both a clear opportunity and a threat to the bank.
The future of banking will see more fragmentation with customers prepared to spread their business around, choosing different financial providers for different services. PSD2 and Open Banking is about making it easier for customers to do this. Customer experience is now at the heart of the new business model needed for Open Banking.
APIs allow banks to track a larger portion of each individual customer’s lives and day-to-day behaviour. The data from these APIs should enable banks to provide better financial management, improved payments, and new products and services to their customers. However, Open Banking is also about banks recognising which services and products they do not provide. In such instances and in order to offer more value to customers, they must be open up and offer those services through an API. Ultimately, the business exam question banks are asking about APIs, is on how they derive advantage from Open Banking.
Banks like BBVA and Fidor have already grasped what financial services provision looks like in a digital economy and are reaping the benefits. Individual banks have a choice to make on how they want to embrace this approach.
Financial service organisations need to view PSD2 as an opportunity – access to data is a two-way street. The forces that drive it – data as a commodity, digital disruption and technological innovation – will not be held back. Rather than trying to stop this development, incumbents should seek ways to take advantage of it.