PSD2 and Open Banking: Part 1 – Is this a banking revolution?
Like it or not, the Second Payment Services Directive (PSD2) and the UK Open Banking Standard are kick starting a financial services revolution that will connect consumers, third party applications and banks in new ways.
The European Commission has reviewed and modernized its Payments Services Directive, to a new package of legislative measures on payment services – to drive increased efficiency, competition and security whilst encouraging lower prices for payments. At the same time, the UK Competition and Markets Authority (CMA) is driving Open Banking initiatives to increase competition, encourage new entrants, and create a new playground for new business models. The CMA is ordering several UK high street banks to ‘open up’ and adopt new open banking principles.
Within this new landscape, PSD2 and Open Banking are acting as a catalyst to incumbents and new entrants as the start of a new data revolution – cementing the customer at the heart of everything they do. In the future if a customer wants to switch accounts, a particular product or their bank (or perhaps we should say service provider), they may be able to with a simple click, or a trusted AI-based digital assistant may even have already done it for them. It’s no longer about loyalty, it’s about what works best for the individual consumer, who will ask how smart can ‘I’ be with my money?
Is this only a Europe-centric concern? No, whilst PSD2 in Europe and Open Banking in the UK is paving the way for new business models and standards, this is the enforced start of the transformation of all banking and financial services that reaches more broadly than the relatively narrow scope of this new regulation. Perhaps further regulation will be necessary, perhaps competition will force continued innovation.
Either way, greater accessibility to banking data and services and new market entrants will make it essential for banks to consider new approaches to transform products, optimize operations, empower employees and engage customers to stay competitive – and while Europe is forced by regulation to move, the rest of the world will have to follow to maintain parity.
Download the Microsoft PSD2 and Open Banking whitepaper
Two concepts and choices emerge here – the bank as a marketplace and banking as a platform. Common to both is an intelligent and connected ecosystem in which integration is the core component and where an API-enabled platform and marketplace is the key strategic consideration. And vitally, access to customer data drives higher level analytic and predictive services that create a competitive edge of intelligent customer insight and robo-advisory services.
Marketplace banking offers complementary third party financial services products alongside a bank’s core product, for example a current account. The bank curates a number of trusted third party providers to provide a more rounded set of financial services and offers these as either white labelled or perhaps as co-branded products. The key here is well-defined APIs to enable ease and richness of integration with the third parties.
In comparison, the banking as a platform concept creates a framework in which a bank creates an open set of APIs (perhaps monetized) for any third party to build products and services from these – and of which the bank ultimately has little control. The PSD2 AISP (account information service providers) model of open access to transaction data and third party aggregator portals is a clear example of this. The depth and breadth of the banking platform opportunity is driven by the scope and access of APIs provided, and by the level of uptake among third parties and fintechs.
Certainly, of the two, banking as a platform has the potential to offer the end consumer the broadest set of capabilities, but does come with some lack of centralized control of quality.
The answer, at least in the short term, is likely to be not one or the other, but a combination. Banks will choose to strengthen products in which they excel today and consider offering these services to others to white label and consume and gain value through scale. In parallel, banks or fintechs may choose to curate best-of-breed products from their own offerings and those of third parties – providing combinations that are compelling and unique. In either scenario, the bank that is most flexible to consume or offer products or services through APIs has the advantage.
Download the Microsoft PSD2 and Open Banking whitepaper. In this whitepaper, we explore the opportunities for innovation and how this acts as a catalyst for your digital transformation.
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