Richard Whomes, director sales engineering, Rocket Software
Banks are in the midst of a very big shake-up. Not only are they closing branches across the country as their customers flood online and receive ever more attractive offers from the new generation of startups, but they will soon be required to share their data with these interlopers. The new Payment Services Directive (PSD2), also known as the “open banking” requirement, will oblige financial institutions to open up their IT infrastructure via APIs, allowing competitors to access their customer records.
The regulation comes into force in early 2018 so banks need to act fast if they are not to follow video rental stores and lighthouse keepers into the collective memory of their customers.
A banker’s bad dream?
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At first glance, the prospects may not seem too bright. The aim of PSD2 is to provide customers with far greater choice, including the ability to access banking services from a wide range of organisations, including technology companies and challenger banks such as Monzo to Metro Bank, but also retail giants such as Amazon and Ebay. No longer can a bank insist that customers use its own mobile services; nor will a customer need to log on to three different sites in order to gain a complete view of their finances. And one of the sector’s core income streams, retail payments, will be hit hard: according to Accenture, banks stand to lose a breath-taking 43% of their payment processing revenue by 2020.
For many banks there is also the nagging concern that customer records are not quite as easy to re-organise as they might be. Many are running on the same IT systems that have been in place for the past twenty years or more. Mergers and acquisitions have brought in vast quantities of customer information that is sometimes still held in separate databases. Not only must all this information be secure yet shareable, but from May 2018 it must also comply with the EU General Data Protection Regulation, which additionally gives customers the “right to be forgotten.” Organisations that aren’t fully on top of their customer data will be in trouble. According to a study from Blancco Technology Group in May of this year, 12% of corporate IT professionals in the UK admitted that they don’t know where all their customer data is stored, so there is work to be done.
Banks sitting on a gold mine
Even taking into account these challenges, however, the opportunities for the banking sector are enormous. Personal data fuels the internet economy. Facebook, which has been the pioneer in this area, reported an operating margin of 47.2 percent in its second quarter of 2017. And banks hold customer data in vast quantities. Not only do they have information about customer names, addresses and other demographic details, but frequently also a lifetime of detail about every pound that an individual has spent, including mortgages, weddings and funerals. It is here that the opportunity lies.
The new fintech organisations are already ahead of the game. They have built their businesses on the principles that have worked so well in the retail sector, understanding that customer service is fundamental to success and using behavioural data to target customers more effectively. The banks, on the other hand, have adhered to a relatively conservative and unchanging model of business, relying on their monopolistic position in a heavily-regulated market. This needs to change. Some have at last begun to analyse customer behaviour to identify trends and to offer targeted products, but banking is still far behind other sectors in this regard.
Co-operating with the competition
The traditional banks would do well to open dialogues with these new competitors. Rather than attempting to place barriers to API access, they will need to work collaboratively with these organisations to offer the new digital services that customers want. In doing so they will not only improve loyalty, but they will also find ways to monetise the data that they hold.
The API licensing process itself offers one way of recuperating the revenue streams lost to competitors. PSD2 is not specific about the standards that need to be in place for open APIs, so the responsibility lies with the banks to devise a workable model with the fintech community that provides access through a structure of licence fees.
There are already signs of a rapprochement between the banks and the fintechs. One unexpected effect of the UK’s decision to leave the EU has been to bring the different players in the financial sector closer together. Barclays, HSBC and Lloyds, for example, are among more than 20 financial institutions to put their name to a recent industry drive to support fintech startups in the UK.
This willingness to co-operate looks set to continue. Two recent reports, from law firm Simmons and Simmons and from management consultancy PWC respectively, indicate that banks are considering investing more directly in the fintech world. 31 percent of financial services firms surveyed by Simmons and Simmons revealed that they had plans to buy another firm, while PWC’s findings went a step further, suggesting that half of the big banks are poised to buy a fintech startup.
Open minds, open APIs
The banks still have a long way to go. Gaining complete control of decades-worth of customer data will not be accomplished easily, particularly while ensuring compliance with a long list of stringent regulations. And for banks to adopt a more open mind-set, as well as open APIs, will take time.
If they can achieve both of these things, however, the new world of personal finance will be an exciting one. Consumers can look forward to greater flexibility, choice, and control over their own money. Banks, along with their new fintech partners, will reap the rewards of a greater understanding of what their customers want, and a new-found ability to deliver just that.