The Revised Payment Services Directive (PSD2) is unlike most other contemporary regulatory initiatives. The aim of PSD2, it seems, is to force innovation in an industry already beset by disruption and challengers ranging from BigTech, FinTech to digital-only banks.
With PSD2, third parties like PISPs (Payment Initiation Service Providers) and AISPs (Account Information Service Providers) can tap into domains which were traditionally dominated by banks but are already under siege by FinTech and BigTech challengers. Rather than seeing this as a further threat, banks can look at it as an opportunity to fight back with the same tactics and regain their lost market share with a vengeance.
It’s all about the data…
Data is perhaps the most important asset that banks possess. It is data that allows them to better price loans and products, better estimate default and other risks, better predict credit events, better structure their product offerings and better spot and service their client needs. It is the use of this data that determines the strength of the asset book of a bank as well as its margins.
PSD2 seems to threaten bank’s hold on that data. And that can be a scary prospect.
But the aim of PSD2 is not to take away their biggest competitive advantage away from banks, but rather to force innovation that takes the usage of that data to a whole new level. PSD2 allows for independent third-party firms to tap into bank’s platforms and access and use customer data (with prior permission of course) to offer new or better services.
…and it’s all about growth
While some see this as a threat, it can indeed be the biggest business opportunity for banks (or any other interested party) to turn it into the biggest growth driver since the internet became a thing. Banks are free to partner with independent third-party developers to create amazing new and innovative products to tap into their existing customer base and increase their wallet share. Why not offer customers some financial or investment advice? Why not try and grab a bigger share of the payment business? Why not make the best possible front-end app so that customers link their other bank accounts to our platform?
What has made BigTech companies like Google and Amazon so successful is their use of data and their focus on the UX (User Experience). However, these companies still don’t have the specific account related data that banks possess. Why not use the large existing customer base, the stickiness of banking products and the treasure trove of data and use that as a foundation for building upon the opportunities that PSD2 provides? So rather than taking a back seat, being satisfied with becoming a utility service provider and letting others work on the front end; why not take the fight to them?
Choosing the right partners
All of this sounds easier said than done and that is true to an extent. Banks have their own competitive advantages and there might be some resistance to venture outside of those areas and invest into new capabilities and new people. However, by partnering with the right expert service providers, banks can easily offset a large part of the risks associated with new product or service development. In fact, it might make more sense to look at open banking and PSD2 as a way to fundamentally change how existing products are offered, rather than thinking of it is as a separate initiative.
Partnering with the right service or platform providers can help eliminate internal resistance to radical change. Creating a new solution from the ground up internally can be a costly and time-consuming process fraught with risks and guaranteed to encounter a lot of the unkowns that can really hurt such initiatives. The right partner can bring to the table proven solutions, while already having the right expertise in-house to customize those solutions to better fit the client’s core banking system, business model and product mix. It will also be invariably cheaper when factoring in all the opportunity costs and the probability of a smooth launch.
Perhaps the best argument for embracing an open banking approach is the consideration for future trends. There will always be disruptions and there always be challengers, but successful businesses know what their customers need (even before the customers do) and how to provide them with what they need.
Customers want a better User Experience (UX), they want one-stop solutions, they want hassle free on-boarding, they want fast and seamless integration with the online services that they use, like cab-sharing, music streaming etc. They also want cost effective solutions and most of all they don’t want to compromise on the security and safety of their bank accounts.
Banks which can provide their existing and prospective customers the best combination of these, and quite a few other things, will be ones reaping the immediate rewards while retaining the flexibility to future proof their business.