The second Payment Services Directive (PSD2) came into force earlier in 2018, bringing ‘open banking’ to Europe. But what does it really mean for both consumers and providers of financial services? And for the latter, what opportunities and threats come with it?
In simple terms, the new directive breaks up what has effectively been a monopoly enjoyed by conventional banks on payments - moving money from one place to another. And in order to make that happen, banks in turn are obliged to open up customer accounts through open APIs to any third party the customer authorizes to access that information.
This in turn accelerates a trend that has been apparent for some time in financial services: the disaggregation of the comprehensive service offered by a conventional bank into what might be termed ‘point solutions’ addressing specific customer requirements such as transferring money between friends ( ie Venmo) or foreign exchange transactions (TransferWise). And those two examples are the tip of an ever-expanding iceberg. Each consumer now has dozens of financial ‘moments’ in any day and these organizations are currently stealing them from under the nose of traditional banks.
The growth of these businesses has been unquestionably supported by the rise of mobile at the forefront of an increasing variety of emerging channels. The constraints of the smartphone interface and the expectations of a generation used to ‘native mobile’ interaction models means that these organizations, that focus on doing one thing and doing it well, have a natural advantage. Banks, with their understandable desire to be all things to all people, can struggle to provide the same intuitive, fast and easy experiences.
But at the same time, doing nothing - particularly as PSD2 opens up the market even further, is not really an option. That way ends in traditional banks picking up only the most commoditised and lowest value business (from consumers at least) and in the long term an erosion in brand equity (one thing most banks still have a bundle of, see below). So what to do?
Making The Most Of PSD (For Banks)
Although times may be changing for consumer banks, some things stay the same. As noted above banks still have a great deal of brand equity in the mind of the consumer. A lot of that equity relates to vital attributes such as trust, security and reliability, as it should do (banks have spent a lot of time and money making sure of that). And whilst the importance of this should not be over-stated - many consumers appear willing to move to new brands in financial services after all - it still matters.
At the same time, a recent EU survey indicated that 37% of European consumers say they would change their bank if it did not offer them up-to-date technology. Put those two facts together and the correct course of action is clear, or hopefully clear enough.
Rather than hoping to shore up the concept of every service under a single brand, existing consumer banks need to accept that one way or another the service they provide WILL be dis-aggregated. And they should lead the way, leveraging their existing brand equity to help their own efforts succeed in what will be a crowded marketplace. It is time for consumer banks to innovate in terms of delivering specific services in the native mobile manner described above - and PSD2 might just be the push they need.
You might ask why banks should compete with themselves in this way. The answer, of course, is that if they don’t, somebody else inevitably will. By acting now they have a chance to maintain their leadership position both in the consumer’s mind and on the balance sheet.
Making that happen will require more than wishing and praying of course. Banks, like many other large, traditional and vaguely monopolistic entities will need a crash course in user-centred thinking. Fortunately the tools are there to help them unpick their services and build mobile and cross-channel experiences that consumers love and help them ‘win the moment’ in the customer’s financial day. They will need to put them to work, but when they do they will be capable of rendering PSD2 an opportunity rather than a threat.
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