We are less than six months away from a tectonic shift in the banking industry – the introduction of PSD2(Revised Payment Service Directive) which will usher in the era of Open Banking. PSD2 mandates that third party companies are allowed to access customers’banking data directly, without going via service providers such as PayPal or Visa. PSD2 is underpinned by APIs (Application Programming Interface), the adoption of which is set to rapidly grow over the coming years. APIs function as the universal adaptors of the digital world, allowing applications from different parties to work seamlessly together.
Many banks are cautious about Open Banking as they will be releasing their data to a huge range of potential competitors but, rather than regarding PSD2 as a compliance issue to be tolerated, it should beweighed as a way to serve customers better.Done right,Open Banking has the potential to dramatically increase customer ‘stickiness’ and improve banks’ overall revenues. However, the success or failure depends on whether banks are able meet the demands of their most important stakeholders – their customers. When it comes to Open Banking, customer expectations are clear; banks need to seriously scale up in terms of their approachability, availability, convenience and uniformity of experience. It can be a daunting objective, but a necessary one.
For banks looking to make the leap to a customer-centric, Open Banking world, it is vital to break down existing siloes within the organisation. Traditionally, the core architecture of banks has been product-oriented. With banks now needing to open up their data to so many others, that’s no longer feasible. Instead, by switching to a service-oriented architecture (SOA) where the customer is at the centre of every decision being made, banks can offer a smoother service and easily integrate their core with other applications. This also means more informed decisions can be made more quickly, speeding up things like the processing of payments, leading to less delays and a better customer experience.
Reaping the Reward
There is no one-size-fits-all approach to getting ready for PSD2, and each bank will need to review its own priorities but, for those that successfully manage the transition, the benefits are many-fold.Three of the biggest are increased revenues, improved customer data and achieving channel neutrality – covered in more detail below.
- New Revenue Streams – API banking presents a major opportunity for banks to open up new revenue streams by partnering with other companies to share their data.The financial data that banks hold on customers is incredibly valuable to many other industries and, by embracing API banking and partnering with service providers, banks can effectively monetise this data. Since customers will need to provide explicit consent for their data to be shared under open banking, banks can generate revenue by having a two-tiered API approach where companies can either get a basic level of data, or pay the bank for more enhanced data (e.g. location data) along with actionable insights for partner companies.
- Better Data – By integrating with other financial service providers, such as investment brokers or crowdfunding sites, banks can gain a more accurate picture of a customer’s overall financial position. This will enable them to offer more tailored, suitable products, and better assess their risk when it comes to extending credit.
- Channel Neutrality – Exposing APIs to the outer world will help banks achieve platform neutral service. The integrated nature of APIs means that customers can use any channel to carry out their transactions in the same way, bringing together a uniform service experience and reducing customer confusion and dissatisfaction.
Managing the challenges
While there are enormous opportunities available for banks to serve their customers better at lower cost, by integrating with third party service providers, API banking is not without its challenges. Banks will face issues with providing uniform customer experience for all the services on offer and fintech start-ups will provide stiff competition. However, if banks are nimble in adopting and eliminating new features, and crucially place the customer experience at the heart of their activities, the situation will stabilise. The future of API banking is bright and we are already seeing increasing customer pull.With PSD2 on the horizon, it is only set to grow in stature and banks need to move quickly or risk being left behind in the new Open Banking world.