As we herald a new era of banking, will PSD2 result in FinTechs challenging the dominance of traditional banking services?
13th January 2018 marked the beginning of the Open Banking era. The EU’s Second Payment Services Directive (PSD2) which took effect earlier this month forces banks to allow third parties, including digital start-ups and challenger banks, access to their customers’ financial data through secure application programming interfaces (APIs), and create a new way for customers to bank and manage their money online. If all goes to plan, PSD2’s main objective is to ensure maximum transparency and security, whilst encouraging competition in the financial industry. The Open Banking revolution aims to create a form of cooperation between banks and FinTechs – however, this doesn’t seem to be the case 18 days after the triggering of PSD2, with a number of banks that still haven’t published their APIs and incorporated the necessary changes. Naturally, the directive is good news for the FinTech sector. FinTech companies and digital payment service providers will gain greater access to high-street banks’ customers’ financial data – something that they’ve never had access to in the past. This will then undoubtedly inspire FinTechs to develop new innovative payment products and services and provide users with opportunities to improve their financial lives, whilst allowing them to compete on a more-or-less level playing field with the giants of the financial services industry, the traditional banks. Does this mean that traditional banks will need to up their game when competing with the burgeoning FinTech industry? Are they scared of it, and if not – should they be?
Traditionally, and up until now, banking has always been a closed industry, monopolising the majority of other financial services. The recent advancement of digitisation has shaken the industry, with FinTech start-ups offering alternative solutions to more and more clients across the globe. From a bank’s point of view, PSD2 will forever change banking as we know it, mainly because their monopoly on their customers’ account information and payment services is about to disappear. Banks will no longer be competing against banks. They will be competing against anyone that offers financial services, including FinTechs. And even though the directive’s goal is to ensure fair access to data for all, for banks, PSD2 poses substantial challenges, such as an increase in IT costs due to new security requirements and the opening of APIs. However, the main concern is that banks will start to lose access to their customers’ data. Alex Bray, Assistant VP of Consumer Banking at Genpact believes that a possible outcome of Open Banking is that banks could end up surrendering their direct customer relationships. If they don’t acknowledge the need for rapid change or move too slowly to adapt to the landscape, they risk becoming “commoditised payment back-ends as new aggregators or payment initiators swoop in”.
However, Alex Bray also argues that for banks to take advantage of PSD2, “they will need to find a balance between openness, privacy and data protection.” There is also a case to suggest that traditional banks who embrace and utilise the new directive to its potential could transform a potential threat into a huge opportunity. He also suggests that: “they [banks] will need to improve their analytics so they and their customers can make the most of the huge amounts of new data that will become available”. Only a well-thought-out strategy will help banks to survive the disruption to the long-established financial industry – and cooperating with FinTechs can be part of it. Alex Kreger, CEO of UX Design Agency suggests that “Gradually, they [banks] could turn into platform providers of banking service infrastructure… As a result, successful banks may lose in service fees, but they will gain in volume. Many FinTech start-ups will not only offer services on their platform, they will actively introduce innovative products designing new user experiences, thereby enriching the financial user’s journey and transforming the banking industry. This will attract new users and provide them with new ways of using financial instruments.”
Only time will answer all the outstanding questions related to the open-banking revolution. FinTech firms are expected to ultimately benefit from all these changes – however, whether the traditional banks will cohere to the new regulations quickly enough, whilst finding ways to adapt to them, remains to be seen.
George Osbourne’s ambitions for the financial sector have the potential to revolutionise the attitude of the UK financial industry. Innovative solutions have caught the eye of the political parties, with Osbourne announcing proposals for banks to open their Application Programming Interfaces (APIs) to boost competition within the industry.
How do open APIs impact the financial sector?
APIs - created by salesforce in 2000 - allow for the communication between two software systems. If open APIs are utilised, the government has ambitions to revitalise the sector by allowing smaller FinTech firms the opportunity to share data with more established institutions, increasing competition within the industry. The newcomers could create new services based on these open APIs that satisfy customer needs. If given the opportunity to sync up with banking technology, innovative tech start-ups could develop apps that support customers with their banking - such as services that allow them to budget for their weekly shop - and keep track of their finances by seeing how their spending fluctuates according to their bank account data.
What are the benefits for the institutions adopting this new approach?
The concept of collaboration within such a competitive market may strike fear in the minds of many bankers. But banks do not have to see themselves as in direct competition with FinTech players - there are also benefits from the bankers’ perspective. The ability to adopt and incorporate technology from FinTech firms when it is needed will allow for banks to simplify the process of adding new services by piecing together building blocks of services.
So how would this work in practice?
The introduction of open APIs could in reality face barriers due to the underlying legacy issues of archaic IT architecture that banks have built up over the years. By simply opening up APIs without concentrating on addressing the core banking issue, IT professionals are brushing the issues under the carpet and attempting to mask the real problem. The first step is for IT teams to evaluate their core business functions. This clarification process could be supported by banks joining forces with one another and IT software providers to define industry wide standards within banking IT, reducing the expenditure that businesses face with IT infrastructure complexity and integration costs. A service orientated architecture (SOA) would help IT professionals untangle the mess of their existing infrastructure and identify which services fit into the building blocks of predefined business services.
The open API proposal that the government declared earlier this year has highlighted an opportunity for banks to innovate in an unexpected way: through collaboration. However for this to be effective, the government will themselves need to cooperate and gain insights from banking industry experts to ensure that the proposal is able to progress into a reality.
Content supplied by Hans Tesselaar, Executive Director, Banking Industry Architecture Network (BIAN)
