The European Commission’s revised payment services directive brings threats and opportunities. What will be the attributes needed to survive and prosper in this new, open world, asks Peter Jan Van De Venn, chief commercial officer at Dutch digital banking solutions provider, Five Degrees.
PSD2 sounds technical and bland, like any acronym. It has hardly registered beyond the banking, fintech and payments sectors. However, the European Commission’s revised Directive on Payment Services could have a seismic impact on customers’ interaction with their banks.
It opens up Pandora’s Box. Banks are required to provide access to account data to third parties at the request of customers. Additionally, the related General Data Protection Regulation (GDPR) requires banks to ensure the portability of their customer data.
As we move towards what is now commonly touted as “open API banking”, PSD2 is expected to be a catalyst for unprecedented customer-oriented change. It constitutes an entirely new legal structure for payments across the EU. It will bring opportunities for banks and fintechs but they will need to amend their operating, business and revenue models, as well as the technology that supports these.
In response to PSD2, banks face fundamental choices. Do they become merely utility providers or the ‘orchestrating hubs’ to facilitate customers, services, providers, and payments? There will be new alliances and the winners will be those with greatest control of their capital and of the touch points on the customer journey, plus corporate and technical agility. Indeed, technology will be at the forefront and will be the differentiator between those that can take advantage of the opportunities and those that will be threatened.
Most interesting will be those banks that decide to set out their stalls as orchestrating hubs for all kinds of financial services across a huge marketplace. They will position themselves as trusted go-betweens for myriad services that can be added, modified or deleted at will.
This has given rise to the phrase ‘marketplace banking’, the concept of a bank acting as a go-between and as the hub for all kinds of financial services, each of which can be easily coupled or decoupled. To put it bluntly, the new bank is a bustling bazaar bringing together a world of services to serve each particular need of any type of customer at any point in time.
This puts new pressures on the underlying technology platform, with a prerequisite being seamlessly interconnected open APIs. This is not just about connecting to the outside world but also about opening up internally through APIs to provide access to a bank’s own services. Key elements will include a digital banking platform that allows a high level of automation through workflow management and a service and integration layer to connect to third parties and to allow those third parties to connect to the bank’s platform and services. All backed up by reliable, up-to-date, all-encompassing data.
According to Gartner, digital leaders and CIOs in EU-based banks should also use the introduction of PSD2 to upgrade their digital banking capabilities to fundamentally now support the expectations of their most sophisticated customers, thereby going well beyond mere cosmetic changes. Tying together and coordinating everything will be technology solutions that facilitate orchestration and unlock the ability of banks to become hubs within fintech ecosystems and within their own traditionally monolithic, siloed and often batch-oriented IT landscapes.
One bank that looks well placed in the Netherlands for the changes is Knab. By virtue of being a relatively new entrant, it was able to adopt a clean, three-layer architecture from the start, with Five Degrees’ Matrix in the mid-office, as that orchestration layer and supporting customer relationship management (CRM), business process management (BPM) and document management. This will aid the bank as it introduces what René Frijters, Knab’s founder, calls a “financial platform strategy” whereby Knab offers third party products in different areas where the match between the customer’s profile and the third party product should be optimal for the customer. It currently offers mortgage products from 28 different suppliers and will increasingly do the same in other areas.
As well as the technology challenge, there is also a cultural one. A bank’s management will need to be honest about its strengths and weaknesses. Where the competencies of partners add value, they should be leveraged to improve the total product portfolio for the sake of client service delivery. There needs to be a shift from assuming that everything is best built in-house.
Taking again the example of Knab, which was the first digital, branchless retail and SME bank in the Netherlands, it is seeking to better serve the funding needs of its SME clients. Knab decided to connect to an external crowdfunding provider instead of creating its own loan products here. This required courage from management to use competitor products. However, Knab’s management understood that using the marketplace for additional products allows the bank to keep close to its customers.
Aggregating all financial information in one place provides great cross-sell opportunities. This makes PSD2’s Account Servicing Payments Service Provider (ASPSP) element particularly attractive to comparison websites. Customers will only need to enter their bank account login details for the ASPSP to access their account via API. The benefit to customers is clear: all accounts can be consolidated in one place.
Incumbent banks do have one competitive advantage: they still ‘own’ the customers’ bank accounts whereas fintechs typically have the technology, the vision and the entrepreneurial spirit. Marrying the two sets of strengths makes sense.
Indeed, PSD2 gives banks the opportunity to be proactive and gain a competitive advantage by embracing open innovation. Many of the most eligible fintech partners are already forging relationships with banks, triggered by the opportunities that arise from the new legislative standard. Looking for alliances is one way to ensure success in a financial world that is facing upheaval.
Recently, several banks signed deals with fintech players. UK-based Metro Bank, for example, forged a partnership with Person to Person (P2P) lender, Zopa, to expand its credit facilities. Other notable new partnerships include digital banking platform Moven announcing a deal with online services, Payoff and Commonbond, and German fintech bank, Number26, tying up with TransferWise, a P2P money transfer firm. Banks that arrive late to the party may have to get in line to see their proactive peers exploit their first-mover advantage.
For traditional banks there will be plenty of concerns about operating in an open API economy. It will mean inviting in new competitors from all corners of the business universe, bringing with them new financial and non-financial services, new customer experiences, and disruption to the incumbent banks while creating a vast, Europe-wide competitive environment. Where there are threats, there are also opportunities, but only for those that move early, embrace innovation, refresh their technology and, perhaps most importantly, change their traditional mindsets.