By Alex Bray, assistant. vice president – Consumer Banking, Genpact
On 13th January 2018, all European Union (EU) member states introduced the Payment Services Directive 2 (PSD2), which through the access to accounts rule (XS2A) paved the way for open banking. PSD2 and XS2A will ensure banks make their customers’ data freely available to other financial services companies and payment providers through application programming interfaces (APIs).
This will be a seismic shift which will come with several opportunities and risks. For example, there are high-level opportunities that the aggregation of financial data in one place will offer for customers, banks, and service providers. However, there are security implications banks face when exposing their API, as well as the competitive challenge provided by start-ups and challenger banksthat, are waiting to get their hands on this data. The full consequences of these changes remain to be seen as it is still too early, but we are starting to see some early examples of how this data will be used.
When will we see changes from the roll out of PSD2?
Since the introduction of PSD2, it has become apparent that several large banks were unprepared – and required deadline extensions. PSD2 creates huge opportunities, but will banks make the most of them?Research by PwC, published in December 2017, found that only 9 percent of banks are ready to implement PSD2. Yet, this is a significant figure considering two-thirds of European banking executives believe that PSD2 will impact their entire core banking operations. This does not bode well for the preparedness to exploit the opportunities of PSD2 – and deliver a better service to customers.
PSD2 isnot going to transform the financial services industry overnight; there will be a transition period and customers will probably see very little immediate change. On 13th January, only AIB, Danske, Lloyds, and Nationwide went live.
However, we have started to see some early examples of innovation start to take form. HSBC along with its subsidiary First Direct partnered with Bud, a London-based fintech-start-up. Together they are trialling an open banking app. This app will allow a mix of HSBC customers and non-customers to view all their account information and receive transaction notices, money management tips, and product suggestions based on individual needs (even from third parties). For example, the app will trawl databases for the best broadband and energy deals, personalised for each customer.
Meanwhile, theEmma app, developed by another fintech, that aims to build the banking app for millennials, has just been given Financial Conduct Authority approval. The app will help consumers avoid overdrafts, find and cancel subscriptions, track debt, and save money. The fintech already has announced Emma’s integration with digital challenger Monzo.
What are the benefits to customers?
Right now customers are not particularly aware of the new regulations. A study by Equifax found that 90 percent of Brits have not heard of open banking. Still, they will see benefits including more options, better prices, and easier processes. There is a possibility that open banking will only lead to the growth of more account switching services unless disrupters start to shake up the banks.
A key reason that customers should care about open banking is that there are some significant benefits to having financial data aggregated in one place. Analysis tools can provide meaningful insights by incorporating data from other financial institutions; for example, companies can integrate credit card statement data alongside current account statements to present coherent financial picture for customers. This aggregated data will be easier to monitor, offering new insights into personal income and expenditure. Comparing financial positions and experiences among similar customers will also be easier, which will help when evaluating and selecting products from other banks.
The regulations also will transform the way customers apply for loans, improving the experience. For example, customers will no longer need to provide information on earnings or outgoings. Instead, financial intuitions will use APIs, providing data directly. This will cut the average time it takes for a customer to complete a new loan application to the speed at which the data can be transferred between banks – it could seem close to instantaneous from the consumer’s perspective. This will radically reduce dropout rates.
”Request to Pay” is another aspect of open banking, It allows customer payments to become more flexible and automated. Naturally, these are just the initial benefits. As start-ups begin to have access to increasing amounts of banking data, it is reasonable to expect greater innovation across the board. This will have a strong impact on customers’ lives as banks and other companies create new financial products.
Are banks in a position to take advantage of PSD2?
It often appears as if PSD2 is helping fintech start-ups compete with the big players. Yet traditional banks also can reap rewards. Some banks have made investments to prepare themselves by developing innovation labs, partnering with tech start-ups and incubators, or creating communities of developers around their banking platform.However, there are still many banks that are not yet forward-thinking, and more content with just satisfying PSD2 compliance requirements so they do not fall foul of any fines.
It is also worth noting that fintechs may not be the main competitor to banks in an open banking world. Perhaps this is the opportunity for other brands? Could it be the price aggregators, such as MoneySupermarket, that are the biggest threat given their established customer bases and strong branding?Acquisitive banks are also more likely to purchase successful start-ups,which is a reoccurring trend.
PSD2 will allow banks to seek out new opportunities and meet customer needs more effectively, through access to customer information held by competitors. It will give banks the ability to make more accurate marketing and credit decisions, therefore offering improved customer service and pricing. With a wider range of customer data, they could become the relationship hub for customers.
It is no surprise then, that PwC found that half of all banks aspire to become aggregation platforms. Acting as intermediaries and developing platforms that allow partners to integrate their products and services into banks’offerings could enable banks to remain at the heart of their customers’ financial lives.To realise this potential, financial institutions will need to improve their analytics so they and their customers can understand – and use – the huge amounts of new data that will be available.
We have yet to see PDS2 transform the banking industry as we know it; however, there is momentum building. Banks are starting to experiment with new services and partners to deliver a truly open banking experience for customers. Once customers understand open banking and how it can improve their experience, they will reward banks that focus on building next-generation services. The best open banking apps and services are still at least several months away, yet those companies that are first to market are in a good position to reap the rewards of this new world.
Alex Bray is an assistant vice president in the Consumer Banking practice at Genpact, a global professional services firm focused on delivering digital transformation.