PSD2 promises to level the playing field so that Fintech startups can compete with established banks for a share of their customers' attention. Will banks quietly comply, or fight back?
Bank managers used to know all their customers by name. They were active within their community, and understood the needs of local businesses, meaning they could provide a highly personalised banking experience to all of their customers.
The decline of high street bank branches, driven by the move towards online and mobile banking, means that the traditional bank manager has become something of an endangered species. The detailed tacit knowledge he alone held about each of his customers is now stored in tables and databases, diminishing the role of the bank teller to little more than an interpreter between customer and machine.
Losing the Customer Connection
Customer loyalty is being eroded. A large scale study recently conducted by RFi Group showed that consumers now hold on average 7.4 different banking products from multiple providers. It also showed that highly digitally engaged consumers hold significantly more products with their main bank, but are much more likely to switch their main bank than less digitally engaged consumers. The convenience of a local bank branch, or the familiarity of a long banking relationship is no longer a strong enough pull to keep customers loyal.
In an attempt to reinvigorate consumer banking, industry directives will now legally compel the banks to create opportunities for new players to compete for market share. PSD2 is a recent European regulation which replaces the original Payment Services Directive (PSD) and comes into force this year. While seemingly anodyne sounding, PSD2 is actually quite a radical directive which aims to make financial services markets more open and more competitive. If it succeeds in its aims, PSD2 is likely to cause bank managers a few sleepless nights indeed.
Key elements of the directive include opening the ability to provide payment processing services, and forcing banks to give customers greater freedom to use and share their account information. What does this mean in practice?
When shopping online, the customer usually types in their payment details on the retailer’s website, and then the retailer collects payment from the customer’s bank account via one, or several layers of intermediaries (each exacting a fee for the service they provide).
Under PSD2, retailers can ask customers to give permission for them to use their bank details and collect payment directly from their bank without the use of acquirers, card schemes or other intermediaries. The merchant or retailer and the bank can communicate with each other directly using an open Application Programme Interface (API).
This creates opportunities for retailers to build direct relationships with their customers, and reduce the cost of doing business by making intermediaries redundant.
Sharing Customer Data
The second major aspect of PSD2 means that banks will be obliged to share some of their precious data with potential competitors. Currently, if a customer holds accounts with several different banks, they have to access each bank website or app separately to view their account information.
PSD2 introduces the concept of an “Account Information Service Provider” or AISP, which will mean that all banks, building societies, and financial entities such as credit card providers and mortgage brokers will be obliged to support the ability for customers to securely aggregate their account details. For example, they could use an app that allows them to view all their bank accounts in one interface, or share some of their account details with an insurance comparison tool to get a lower quote.
The result of this is that new providers – and not just banks – will be able to consolidate and acquire information about consumers, making it easier for them to cross-sell new products and services, and potentially further eroding the relationship between banks and their customer base. Consumers will be able to vote with their feet and use the most convenient web-based or app interface to access all their online banking information.
Companies like Money Supermarket, Compare the Market, and MoneySavingExpert are part of the first wave of Fintech companies who built their business models on making information about complex financial products easily available to consumers. PSD2 will create even more opportunities for smart new companies to create and sell compelling financial products and services.
And the next wave of Fintech startups is already starting to take advantage of the opportunities this changing landscape presents. For example, Deposit Solutions, a German startup which recently received investment from Peter Thiel, enables people to use banking products from multiple financial institutions without having to switch banks, and UK insurance startup Cuvva is taking advantage of the API service the DVLA provides in order to offer consumers on-demand car insurance by the hour.
Comply or Compete?
PSD2 presents an existential crisis for traditional banks, forcing them to make important strategic decisions about their role in the value chain. Should they compete with their new Fintech adversaries for their share of customer attention and relevance, or content themselves to merely comply with the directive, focus on their core business, and leave third party providers to sell and cross-sell to their customers?
PSD2 is not ‘just another regulation’ requiring operational compliance, but an acceleration of the data-driven disruption of incumbent banks by innovative third party service providers. The ability to quickly access and exploit data for competitive advantage will determine which companies will thrive, and which ones will die.
If the banks want to compete, they mustn’t hesitate - the time to take control of their data is now.