In the recent report, ‘Thinking like a Financial Institution’, we examine the main challenges faced by Financial Institutions in the technology-enhanced 21st century.
One of the main challenges sited in the report is regulation, specifically Open Banking/PSD2 – a regulation forcing Financial Institutions to open up their data systems to third parties. This blog will look into reactions prior and post the implementation of PSD2 (Payments Services Directive 2), in January 2018, by consumers, challenger banks and Financial Institutions, specifically banks. Also, focusing on how the future may look for Financial Institutions, concluding how technology vendors can help these organisations overcome their current and future challenges.
As the world becomes digitalised, major traditional banks, such as HSBC, Lloyds and Santander are being forced to evolve and adapt in order to keep up with the likes of Monzo and Atom, digitally native challenger banks. Governing bodies are enforcing this evolution by implementing new regulations like Open Banking, otherwise known as PSD2.
Overview of PSD2:
PSD2 is a regulation implanted by the EU, forcing banks to open up their vast customer databases. This is possible due to new technology, APIs (Application Programming Interface) which enables organisations to share their data with third parties easily and securely.
There are many benefits to PSD2, it enables banks to provide customers with a more cohesive and efficient service, and increased partnership ecosystems gives customers a greater product portfolio to choose from. Challengers and other technology enabled companies also benefit from PSD2 as banks have to share their customer data with them, allowing these organisations to create better targeted offers and in some cases to become a bank.
However, there are negatives to PSD2, as traditional banks open up their vast customer databases, they face the issue of amalgamating siloed systems, and subsequently tracking data as it shifts across to third party APIs. Additionally, traditional banks may end up losing the competitive advantage their customer data brings, as other organisations can utilise this data more effectively, for example creating personalised offers.
Initial reaction to implementation in January 2018:
According to a recent survey by consumer group Which? 92% of respondents hadn’t even heard of PSD2, let alone when, how or why it was going to impact them. Those consumers who had heard of the legislation, the main objection was because of security fears with the bank sharing such sensitive data with third parties.
However, challenger banks welcomed the shift in banking, with the likes of Anne Boden, CEO, of digital challenger bank Starling stating that PSD2 will bring “the convenience and efficiency of the way we use our smartphones, to the way we manage our money”. This modern outlook is reflected across the other non-banking sectors as well, with PSD2 enabling major companies such as Google and Apple to join the marketplace.
A main fear of traditional banks is the difficultly to digitise fast enough in order to be able to offer the digital experience and convenience the challengers will provide to their customers. Another issue for traditional banks is if their systems will be ready to accommodate the transfer of information, this amalgamation of data has been, and remains, a primary challenge.
One month on:
The reaction from customers has been small, but, they are beginning to see a benefit with direct business to customer interactions where the intermediaries have been removed, such with Access to Accounts (XS2A). Yolt, a fintech owned but ING believes the initial results are optimistic and “customers are receptive to the possibilities open banking can offer”.
Whereas Challengers such as Starling have started to use this legislation as a way to move further into the banking world, but they are conscious the success of PSD2 is totally dependent on value it bring customers.
One-month post implantation, the reaction from traditional banks has been varied. For example HSBC have used it as an opportunity to launch a new beta app, enabling customers to view all their accounts on one screen. Whereas, many traditional banks are struggling to meet the new requirements, leaving a large gap in the market for technology vendors to help fill.
Future looking – putting on the 2020 glasses:
The initial impact of PSD2 has been small but as banks build their partner ecosystems and customers become more aware of the new benefits to them, we will start to see Open Banking really take off.
However, in the next 18 months the most controversial aspect of PSD2 will be decided: making non-banks perform strong customer authentication, this will have major impacts on the retail sector and convenience of the customer. Many banks, both traditional and challengers believe we won’t see a real impact of PSD2 for at least two years.
In future, banks and other Financial Institution need to fully utilise the new technology entering the marketplace, to become a complete end-end provider for the customer. These major organisations need to do away with old siloed systems and embrace the opportunities brought about by Open Banking. Only innovative technology providers who truly understand these organisations problems and have effective messaging which reflects this will be used.
Read our latest report, ‘Thinking like a Financial Institution’, to understand these challenges more and how to position your technology as the perfect solution.
About the author:
Alexandra Wallrock is an Account Manager at The Craft, interested in technology and its impact on the real world. At The Craft she helps organisations truly understand the value of thinking like a customer, she helps them through every step of their positioning journey. For more of her views follow her on Twitter: https://twitter.com/Alexandra__PR