European payment rules push banks to collaborate or perish
When the Payments Services Directive (PSD2) comes into effect in 2018, the unprecedented regulatory upheaval will compel banks to explore new business models, commercial strategies and operational practices.
In the open banking era, collaboration will be key as banks move to employ partnerships not only to expand the range and quality of services they can deliver, but also to capitalise on the vast pools of untapped data they already hold.
The most immediate impact of PSD2 will be the proliferation of new, innovative banking applications and services from third-party providers (TPPs). Contrary to what some banks may think, this is really good news for them.
Compared to other industries, the development of financial services has long been constrained by operational conservatism, stringent regulation and lengthy product development cycles. PSD2 will pave the way for change. By identifying and collaborating with high quality TPPs, banks can quickly and efficiently deliver the innovative digital services that consumers want.
Fast movers here stand to gain significant competitive advantage.
There is an important caveat, however. Few banks will be content to hand over control of their customer relationships and rely entirely on a new portfolio of third-party apps. Instead, banks will want to remain competitive by maintaining direct relationships with their customers. This means staying relevant, which brings banks straight back to how they can make the best use their customer data.
Despite the mandates of PSD2, banks still have a huge opportunity to use their vast pools of data to stay ahead of the market. Yes, PSD2 will force banks to make transaction data available to third parties through APIs, and yes, this means that in some cases banks will lose the customer exclusivity they currently enjoy. Crucially, though, banks are not mandated to make all their data available. From this perspective, and for the moment at least, they will stay way ahead of the TPPs.
Banks can also act as TPPs themselves. Independently or, more likely, through commercial partnerships, banks can complement their own data with API calls to other banks, aggregating more data points than an independent TPP could do alone. Banks can then connect and collaborate with retailers, other service providers and developers, for example, to create new business models and revenue opportunities.
To do this effectively, however, banks must work now to centralise and understand the data they already have. Right now, banks have oceans of data but lack insight. The extraordinary potential of artificial intelligence and machine learning technologies, however, will allow banks to sail into these uncharted waters. Banks should be working right now to identify partners who can help them harness this analytical power, and indeed many are.
To truly embrace the open banking revolution and seize the opportunities it presents, banks and financial institutions must resist the urge to close ranks.
An open and collaborative approach, however, is resource intensive and inherently experimental, and though the costs and risks can be absorbed by the largest banks, it will present challenges for those with more modest resources. Cross-industry collaboration is therefore essential. The ability to discuss best-practice, shared experiences and exchange ideas in a commercially neutral environment will remain invaluable.