The new EU Payment Service Directive (PSD2) is expected to transform the UK banking sector by making it easier for customers to share their account and transaction information with third party non-banking businesses, like technology or retail companies.
Coming into force in January 2018, the scheme could be the catalyst needed in the financial industry to kickstart a technology revolution that has been bubbling around the established banks for several years.
According to Craig James, CEO of e-commerce regulatory specialist Neopay, PSD2 and opening up customer data could leave the “traditional” finance market with no choice but to embrace better technology and a more customer focussed offering, or leave them at risk of being left behind in a faster moving fintech industry.
Open API banking to spark fintech revolution
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Enabling non-banking businesses to get access to customer account and transaction information – with that customer’s permission – will be a major change introduced by PSD2, as it will give technology businesses access to the same type of information as major banks, but without the infrastructure costs.
This will give smaller companies a substantial advantage when it comes to focussing on creating the next generation of banking service apps and it likely won’t be long before we see a thriving ecosystem of new emerging businesses – and potential partnerships between established banks and start-ups – providing the kind of personalised products consumers now want.
Of course, the promise of personalisation is nothing new in the world of banking and finance and there is no shortage of products already available that claim to deliver this, whether it’s a new credit card or saving account that is “tailored” to the individual.
All of these products carry the same issues however, and that is that they are only usable across a single account, and are incapable of adapting to changes in circumstances without an action from the customer – which is not always convenient, or a top priority.
By opening up APIs and making it easier to transfer data between systems, PSD2 enables fintech businesses to create genuinely personalised products which can carry out a variety of tasks automatically and be accessed from a single point on a phone or tablet.
Putting a person’s entire financial footprint into a single, well secured, point of use will give fintech businesses the chance to totally change how customers engage with banking.
Automated budgeting, payments and balance transfers
When it comes to banking apps there are plenty out there that offer help with personal budgeting and storing financial information. They are however, limited on what they can do and most, if not all, essentially serve as a replacement for a paper ledger for recording income and outgoings.
It is still up to the consumer to stay on top of the information.
By opening up the banking sector in PSD2, the industry is finally creating an environment where innovative businesses, with access to every aspect of a person’s finances, can create the kind of budgeting tool that takes the onus off the customer.
With the ability to monitor balances across multiple accounts and react to real time outgoings, new banking apps could “learn” to take control of a financial situation to assist a customer before they get into difficulty.
One instance of this would be if a customer had a bill due to be paid from one account without sufficient funds, but the balance from another account would cover the amount and stop the person becoming overdrawn.
Currently in that situation the customer would be forced to make the transfer before the bill’s due date, but a “smart” app could notify them of a potential issue and automatically transfer enough money between accounts to pay the bill and avoid an overdraft charge.
The same principle could also work across the balances of several accounts and, considering that most people now have more than one active account, oftentimes with multiple banks, thanks could prove an invaluable product.
Tech based debt solutions
While “open banking” apps could be used to help people stay out of financial problems, they could also be created to help people get out of problems they are already in.
New apps would be able to monitor an individual’s income and expenses in real-time, instantly updating balances, and suggest ways that outgoings could be reduced, or identifying consistent instances of over or unnecessary spending.
It is also possible, if these apps are developed in partnership with banks, that they could also be integrated into bank systems and suggest individual saving plans.
The real-time aspect of this technology is the where the potential lies for financial markets in the future and is something customers have long been frustrated at not having access to in the past according to our own research.
For a long time now the banking sector has failed to innovate and, as customers become used to paying for items electronically and engage with their banks less the traditional establishment is in danger of being left behind by the incoming pace of change.
One thing is clear, the emphasis is shifting more towards the use of financial technology to develop new products and this will prove ultimately beneficial to customers.