HOW PSD2 IS TRANSFORMING BANKING BUSINESS MODELS

By Karen Wheeler, Vice President and Country Manager, Affinion UK

It’s been more than two months since PSD2 came into force and change is already afoot. Banks across Europe know exactly how the new rules will transform the industry, so it’s unsurprising that much of last year was spent preparing for this legislation. By forcing so much time and effort to be spent on compliance, PSD2 has been a catalyst for traditional banks to look at their business models and question their validity and relevance in the 21st century. For many, it will be viewed as the start of a new journey for banks that now have to question the future role they will have in their customers’ lives and how they’ll remain competitive within the industry.

The rise of challenger banks and the fintech movement means the UK is a more competitive landscape than ever before. This is great news for customers as the power is now firmly in their hands, thanks to increased choice. But for banks, the chance of them changing provider is a real concern. This means they have no choice but to continuously improve the customer experience, as resting on their laurels risks them falling behind the curve and pushing more customers away. As the evolution of the industry continues, the future success of banks is dependent on their ability to meet the needs of customers and prospects, particularly through digital channels, products and services.

Market change remains inevitable – PwC predicted that “2018 is set to be a game-changing year for retail banking”.To combat this, new business models have already been explored by banks to guarantee customer engagement and loyalty in the future.

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PSD2 is accelerating this further, as banks adapt to the reality of the new legislation and see exactly how customers are responding to the latest changes.

Financial industry embraces change

Both established banks and fintechs have already started to change their business models since PSD2 kicked off in January. We’ve seen mobile-only challenger Starling Bank announce four partnerships for its in-app marketplace in February 2018 alone. This is just the starting point however, as the firm has confirmed these are just the first of 25 planned partnerships for this year. Part of a wider trend of start-ups becoming finance platforms, it aims to become a hub for people’s financial lives by selling third-party products like insurance and even mortgages through the app, and taking commission of each customer that is referred to other services through its marketplace.

In the world of high street banks, Santander is leading the charge for fintech partnerships. Recently, it announced it’s working with fintechsPixoneye and Gridspace to bring predictive personalisation, connected finance technology and conversational intelligence to its customer offerings.

Collaboration of challengers and traditional banks

While there is indeed competition between the old and the new, there is a growing trend of banks creating marketplaces and partnering with fintechs and third parties to draw on their experience and offer services through a branded platform, akin to Amazon’s in the world of retail.

By moving from a position of seeing each other not as competition, but potential partners, they can capitalise on each other’s strengths, meet the needs of today’s customers and drive forward innovation. The industry is increasingly open to collaboration; a global survey by PwC found that 82 per cent of banks, insurers and asset managers intend to increase the number of partnerships they have with fintech firms over the next three to five years.

Working together in this way provides a clear opportunity to capitalise on the strengths of both. High-street banks have worked tirelessly for years to build trusted brands and achieve consumer loyalty, while fintechs offer the digital agility and expertise traditional banks often lack, held back by regulations and legacy infrastructures.

Seize the opportunity

Regardless of whether traditional banks view it as a threat or an opportunity, developments like PSD2 continue to drive industry change. Now’s a crucial time for these banks to ensure they are differentiating themselves from the competition and focusing on innovation is key to this. With tech giants eager to occupy the role banks have within customers’ lives, banks that stick to age-old business models will be left behind by innovative disrupters before they know what’s hit them.

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