PSD2 and Open Banking: Part 2 – So, what is driving this?
As we discussed in an earlier blog, the Second Payment Services Directive (PSD2) and the UK Open Banking Standard are kick starting a financial services revolution. We see three core factors at play, forcing this inevitable change, and regulators acting as a catalyst to encourage this.
- Customer expectations
- Competition
- Technology
Download the Microsoft PSD2 and Open Banking whitepaper
Customer expectations
Customer expectations change rapidly and will continue to do so. Millennials and early adopters across generations are at the forefront here being far from loyal to high street banking brands, they expect full service digital banking – and often trust tech brands to provide better service.
More than ever a customer’s choice of bank is influenced by ease of digital access and ease of integration with higher level services, as much as it is with rates or premium account features or branch locations. Banking is fast becoming just one step in the way of getting the ‘stuff’ you need. Banks need to adapt and adjust to this new attitude to maintain market share. (Find out more about banking disruption at www.millennialdisruptionindex.com)
Although, this new model disfranchises the traditional card model, existing debit/credit card and PSD2 payment models will co-exist. According to a survey on PSD2 conducted by Accenture in 2016, more than 50 percent of consumers will use a PISP (payment initiation service provider) product that is secure and offers extensive retail options. One in three debit card payments and one in ten credit card payments are expected to move to PISP by 2020.
Competition
Today’s high street banks have evolved numerous layers of organization, process and technology designed to maintain stability and minimize risk. When all around you behave similarly, this status quo is maintained. However, these rules will not be followed by new banking entrants without the legacy (fintechs that specialize or don’t fall under the same regulatory scrutiny, and disruptive entrants from other markets).
As most of this new competition will struggle to compete directly on price – agility and customer focus are the two factors most likely to disrupt – and this may well be attractive enough to make significant shifts in market share.
Technology
The checklist of potentially game-changing technologies continues to grow and drive customer expectations – AI, bots, bitcoin/blockchain, biometrics, big data, predictive analytics and Internet of things (IoT) are just some of the technologies promising to change the art of the possible. Regardless of the technology, easing customer journeys, automating the tedious, providing just in time and access-anywhere information and services are the promise of the new normal today. Before long, even this list will become commonplace or obsolete and replaced by new innovation capturing the attention of fintechs and consumers alike. Ultimately, it is the flexibility to rapidly experiment with, adapt to, and adopt emerging technologies that will allow for continued relevance in the marketplace. Uber is a case in point, bringing established technologies together to connect buyers and sellers via a marketplace which focuses on a great mobile experience, where payment is an integral but largely invisible by-product.
The old regulatory barriers that had kept competitors at bay no longer seem to work. Some bank competitors have emerged that simply do not care about regulation and have intentionally sought to thwart it – bitcoin and the payment ecosystem that has built up around it is a perfect example. Others, such as the large (and growing) accredited investor community, offer the ability to loan money to individual borrowers through marketplace lending platforms. Rather than coming to the banks’ aid with new types of protection, regulators have thus far encouraged competitors, with measures such as PSD2, Open Banking, and the US Office of the Comptroller of the Currency’s proposed fintech charter. Unbundling of banking services has become yet another tool for the prudential regulator to employ in combating moral hazard.
So, what is the opportunity presented by all this threat of change and potential disintermediation?
The bank that is most embedded in Facebook, Skype, Xbox, WhatsApp, Auto Trader, JustGiving and others, that facilitate these scenario-based customer journeys, will establish first mover advantage, mindshare and scale.
This ’presence’ will soon be matched by others and the progression will be to banks that can automatically create value chains personalized to the customer’s buying requirement. Imagine this as an emerging real-time spot market, in which multiple potential suppliers transparently bid for a link in the chain to meet your specific needs.
Banks will play different roles, as they do today, but those that act in the ’Intel inside‘ or ’powered by Visa‘ role in this new distribution model will retain some brand presence, access to data and the ability to aggregate and serve additional value. As customers come back to their traditional banking channels for higher touch services such as wealth advice, taxation or mortgages, this insight will enrich the customer experience and brand value and so diminish the threat of disintermediation.
Maintaining access to data will become critical to participate in the largely untapped channel of access to personal financial data. The huge wealth of deep insight into customer behavior that can be gained through analysis of spending history, financial health and financial products owned could be a lucrative source of income for those controlling access to it. There are of course enormous privacy issues to overcome before this becomes a widespread reality, but recognition of and preparation for this potential future can only be a smart move. All of this will require sophisticated orchestration, authentication and verification done automatically, and at speed.
Download the Microsoft PSD2 and Open Banking whitepaper. In this whitepaper, we explore the opportunities for innovation and how this acts as a catalyst for your digital transformation.
Read more on the Microsoft Banking & Capital Markets and Insurance blogs.
