Craig James, CEO of Neopay, tells Finance Monthly PSD2 will prove to be the most beneficial piece of legislation for fintech companies in years, and could completely change the face of the UK banking sector.
While technology has grown increasingly important in the financial sector, the “traditional” industry has been slow to adapt as consumers grow more frustrated by the lack of progress.
Innovative start-ups, looking to fill the gap left by the traditional establishment’s hesitation to change, have been growing in prominence as some banks, regulators and the government try to encourage new ways for businesses to engage with customers in a market suffering a long-standing loss of reputation.
Coming into force in January next year, the EU Payment Service Directive (PSD2) is the latest change facing one of the country’s oldest institutions, and could prove the catalyst for a technology revolution in the sector driven by innovation in personal banking.
Putting consumers at the heart of the fintech revolution
The most substantial change in PSD2 is enabling customers to allow third party businesses – like technology companies – to have access to all their bank data.
For fintech companies focussed on bringing new products to the market, this presents a new opportunity to create these offerings, without the infrastructure costs facing traditional banks.
Personalisation has been a buzzword in banking for some time, and there is no shortage of products from savings accounts to credit cards that are promoted as tailored to a customer’s needs.
However, while banks can provide a card with an interest rate suitable to the customer, the current offerings are incapable of working across multiple accounts, and cannot adapt to real time changes to a consumer’s individual circumstances.
PSD2 opens the possibility for fintech businesses to create “one stop shop” apps for bank services, allowing a customer to access and manage every aspect of their financial footprint from a single point.
These technology based products will put the consumer back at the heart of banking as businesses will be forced to adapt their products, or face getting left behind by smaller technology businesses which can suddenly offer better services.
It will also open entirely new ways for consumers to manage all aspects of their financial needs.
Better budgeting
There is already a plethora of products which can help customers with their finances, but they are severely limited in essentially being a replacement for paper based tracking. The onus is still on the customer to stay on top of the information.
However, by getting access to a person’s account information and financial history, a fintech company could create a genuinely personalised budgeting tool which could remove the management aspect from the customer.
By being able to monitor balances and outgoings in real time, these apps could be programmed to learn when particular bills are due and, if one account is lacking funds to pay, the app could notify a customer and then automatically transfer money from another account – or combination of accounts.
Considering that most people have more than one active bank account, this type of capability could prove invaluable for customers, helping them avoid unnecessarily falling into debt because they failed to move money around in time.
Real time debt solutions
For those customers who have already fallen into debt, new technology based bank apps could be created to offer real time solutions to help consumers pay down the money they owe, and get out of difficulties.
One of the major frustrations with current banking services, according to our research, is that balance updates are not always immediate and in some situations a user is not being shown an accurate account of their financial situation – which makes it hard to make decisions.
New banking apps could greatly benefit these customers by assessing their income and spending habits – while updating account balances in real time – and instantly suggest ways that customer could reduce their out-goings.
There is also the potential for banks to adopt these kinds of apps, which could be used to find or suggest savings plans.
The biggest benefit of this wave of products over existing services, is that they could monitor activity across multiple accounts in real time. The real-time aspect of these tools could help customers by instantly alerting them to unusual activity or if an account is in danger of becoming overdrawn.
While the “traditional” banking sector is at risk of being left behind by the speed of technological change there remains great potential for banks and fintech companies to introduce a wave of new products and tools for consumers that can help them manage their personal finances better.
PSD2 could kickstart the biggest chance the banking sector has experienced and, in the long run, will prove extremely beneficial for those institutions most able to implement technology at the heart of the customer offering.
Like most industries at the moment, the financial sector is experiencing vast change, and fresh legislation is coming into play to adjust to the shifting economic landscape and its demands. For financial services and payment services providers (PSPs) operating in the online banking arena, this will raise some concerns.
The Second Payment Services Directive (PSD2) came into force in January 2016, and will become EU law on 18th January 2018. PSD2 looks to encourage competition, protect consumers, and unify Europe’s markets. The implementation has been prompted by the growth of e-commerce and mobile business, and despite Brexit, this is something that is relevant to all European operating PSPs and banks.
The industry is accelerating towards the age of open banking, where PSD2 will enable previously-isolated payment accounts to draw upon one another, giving third parties the ability to access a bank’s application programme interface (API). This will allow them to bypass traditional compliance and infrastructure demands placed on the host. By doing so, the legislation removes the banks’ monopoly on their customers’ account information and payment services.
Many first-mover FinTech organisations and open banks have already recognised the opportunity here and thanks to their agility, have already earned customers’ trust. But the change isn’t quite so readily adaptable for the likes of the established banks.
Indeed, it’s understandable that most established banks see PSD2 as a threat, or at least view it with uncertainty. But the approaching era for open banking is inevitable, and these banks will need to instead consider how this legislation presents fresh opportunities and will incite new, best business practices.
Not all banks are viewing this legislation negatively. In fact, PwC recently found that nearly half of them (44%) are preparing to offer open banking in the next five years. However, with PSD2 coming into place in January, these plans may need to be brought forward.
PSD2 makes the need for collaboration and innovation explicit; only by developing new systems will PSPs meet the consumer’s increasingly-high expectations for fast, simple and secure digital banking. But this won’t be straightforward for banks with legacy technologies, however, they do have other benefits such as access to vast amounts of data, robust customer relations and scope of reach.
As a result, despite banks inevitably being slower than PSPs on the uptake, their scale and heritage will enable them to face the challenges brought about by PSD2 and subsequently they’ll advance their services with new levels of customer-centricity in doing so.
Another benefit for banks will be the ability to integrate third-party approaches to building and testing new business models, enabling them to more flexibly meet changing consumer demands. And by taking a collaborative approach, they will be able to extend their reach into new markets, and draw upon deeper insight from consumer data to create new products and services.
PSD2 may seem like it is opening the door to competition, but doors swing both ways. By overhauling their technological capabilities to meet digital demand, it will not be long before banks are working more closely with the forward-facing third parties that are proving so popular with the consumer – and even beating them at their own game.
Website: https://www.blackpepper.co.uk/
David catches up with Don Ginsel of Holland Fintech. Don and David chat PSD2 and mature startups.
