PSD2's lack of standards threaten European banks
The success of open banking will ultimately depend on the difference it makes to customers. It’s one thing for people to be able to see all of their various account balances in one place. But if the process for moving money or managing payments remains largely unchanged, is this really much more than a gimmick? It will take something more to influence customer loyalty.
If banks want to maximize the payback from open banking, they must come up with new linked customer-centric services – which, ideally, they can monetize. Under open banking regulations, basic third-party account access must be provided for free. But if banks can build on this facility, they could set themselves apart in the market and develop new revenue streams, by providing richer datasets to third parties which they can charge for.
The first thing to realize as part of this journey is that not all APIs (application program interfaces – i.e. the software interfaces enabling the connections to banking systems) are equal. Although early adopters of open banking in Europe have developed APIs using current PSD2 open banking specifications, each bank has tended to apply them in its own way. This has created complexity as third parties try to gain access to different institutions’ data.
When combined with the general lack of a broader vision for open banking, this has led to a fairly lackluster first generation of new customer experiences. Most financial institutions have settled for a rudimentary pipeline to allow other banks and third parties access to very basic customer account data, which they are duty-bound to do by PSD2 (the Second Payment Services Directive).
This entry-level, DIY approach has compromised the impact. Banks have incurred more cost and effort than necessary, while restricting their scope for innovation.
The danger now is that next movers, including financial services innovators outside Europe, will step into the breach. They will cut straight to the interesting use cases with a next-level, standard API – one that is globally applicable, provides consistent system integration and data exchange with all banks, and which has been designed to support value-added services for consumers.
A typical service innovation might include support for managing personal finances more readily across diverse accounts, providing loans and investments with different institutions, using easy-to-adjust rules to rebalance funds, irrespective of where each account is held. Another might provide the flexibility to adjust recurring payments effortlessly – say, to a mobile phone contract or subscription service such as Netflix or HelloFresh – or complete high-value purchases or finance agreements instantly, using an on-tap ID verification/affordability assessment service.
Furthermore, offering banking access privileges to a range of other organizations (with customers’ permission) is something banks could charge a premium for. Retailers and brands looking to enhance customer loyalty would relish the ability to understand more about household budgets and consumer spending.
This broader data-sharing potential needn’t be seen as sinister, if those brands respond with more meaningful customer rewards. With an advanced API, it should be possible to create robust controls around all of these scenarios – including first-rate secure customer authentication, permissions management, and more. All of which are critical in building and maintaining consumer trust.
These are just some of the value-added consumer use cases that are opened up by an advanced, standards-based API.
Those banks that command an API advantage today have much to gain as innovative first movers in a next-generation financial services environment – by transforming the customer experience, and cementing and winning more business in the process. This is especially true at a stage when third parties are willing to pay for superior functionality and the ability to roll out their own superior experiences.
Banks that fail to seize the moment, by contrast, could see others commanding all the attention and applause. The latter might include newer challenger banks, or institutions in the Middle East, Asia, and Africa, which have been studying and learning from developments in Europe, and hope to cut straight to the profitable opportunities.
The other risk from complacency and conservatism is that established banks give away free access to their crown jewels, before conceiving and formalizing new revenue streams. Rather than lose any more ground now, European banks would do well to partner strategically to bolster their opportunities.