The Open Banking framework/PSD2 directive has got everyone in the banking industry pretty excited. Finally banks must open a limited set of APIs (Application Programming Interfaces) to third party organisations, providing fintechs with the opportunity to offer value added services for banking customers. It is also advocated by the consulting industry as a massive opportunity for banks who can leverage partnerships to create new revenue streams. This might all sound fantastic. But it is important to remember one key element. The customer. Customers have rightly been notoriously careful with their banking data in light of numerous security issues and phishing attacks etc. Even though PSD2 demands strong and secure authentication as well as common and secure communications, any fintech presuming that customers will happily provide access to their banking data is likely to be disappointed unless it has a compelling business incentive.
A core set of services in the directive centre around transactional data. So called Account Information Service Providers (AISPs) can demand access to banks’ transactional data to provide enhanced services for customers. Perhaps you might allow access to your transactions for the AISP to help you find the best mortgage or consumer loan or to provide you with a credit score or robo-advisory services. The categorisation of transactions has been key to the success of many PFM (Personal Finance Management) applications and there is no doubt that some fintechs (AISPs) can do this better than many of the existing banks. Some offer budget planning applications which can aggregate multiple accounts or financial education platforms that may support you by providing a better visual overview of your transactional data. There are certainly cases whereby customers will be happy to provide this access, especially if they require loan finance or need a credit rating. But these benefits do not fall to the banks themselves unless they use the directive to provide services such as account aggregation with a view to cross-selling as is already the case with some pioneering incumbent banks. It is also likely that some customers using secondary financial platforms such as Revolut will provide access to their primary bank’s transactional data as the secondary platform may provide improved PFM services.
A second set of services fall around payments. We know that the interface massively influences consumer behaviour so providing the consumer with a faster more frictionless experience when shopping or using retail services online will be extremely compelling. Initiating payments for the customer by acting as a Payment Initiation Service Provider (PISP) is likely to be hugely successful for online retailers like Amazon as it will lead to a more frictionless retail experience threatening the traditional players (e.g. FirstData, WorldPay, Visa, Mastercard) in the payments’ ecosystem. It is difficult for banks, known as the Account Servicing Payment Service Provider (ASPSP) in PSD2 jargon to monetise this process unless they were to act as the PISP in their own right, which would prove challenging. One can also imagine that currency exchange services such as TransferWise will have a strong enough product offering to persuade customers to provide access to their payments to allow for less friction in the currency exchange processes. And here the banks may be forced to collaborate with TransferWise or similar businesses or to offer mid-market rates themselves. This would be in the spirit of the directive in that it provides for the level of competition that the legislation envisioned.
Of course, the core benefits here do not pertain to the banks themselves despite the consultancy overtures unless they act as PISP or AISP. Some new kids on the block such as Starling Bank are taking no chances and will take the role of AISP and PISP in addition to their core role of ASPSP (Bank). However, many incumbent banks would struggle to move that fast. Of course, banks can invest and partner with fintech, as for example with HSBC’s recent investment in Bud and we will surely see more acquisitions and partnerships. Where PSD2 may have a transformational impact is by driving competition in forcing banks to remain relevant business partners that truly deliver on an engaging experience for the customer, in some cases negating the need for the customer to look for additional services from third parties. And in the cases where value is outside the banks competence, being brave enough to partner with new players. This will require bravery from legacy banks to concern themselves first and foremost with the financial health of their customers, even if that means giving up on some traditional revenue streams to avoid losing further ground to more innovative fintech competition. Exciting times indeed and fortune favours the brave.