Wednesday, Dec 2, 2020
International Finance
Banking

PSD2 should be a wake-up call for the big banks

Established banks have a lot of data, but most of them aren’t doing much with it right now

As the deadline for EU member states to bring their legislation into line with the second Payment Service Directive (PSD2) rapidly approaches, one of the most significant changes to the way banks operate is starting to take place.
With the Access to Account (XS2A) stipulation within PSD2, banks will now have to be in a position to open up their customer data to third parties on request — whether these third parties are their direct competitors, challenger banks or nascent fintech startups.

This could be regarded as a frightening time for the traditional banks, who run a very real risk of becoming simply ‘dumb pipes’ — mere infrastructure for customers’ financial activities. However, the opportunity these new regulations open up to all financial institutions — and non-financial ones too — will actually offer great rewards to those who embrace them fully.

Banks are faced with a number of options when it comes to PSD2. The first — to comply with the regulations and no more — may seem like the simplest, but it is actually by far the most risky. This approach will mean that these banks soon become invisible to their own customers. They will still have to facilitate transactions and actually hold the account, but their customers will be seeing the slick interfaces and branding of third parties instead. The result will be disastrous — without getting any direct interaction, banks will lose out on opportunities to upsell and boost loyalty among their customer base.

How banks can benefit
So, banks must do more than simply comply. One way they could begin to actually turn the PSD2 regulations to their advantage would be to not only create the APIs (application programming interfaces) required to enable third parties to access customer data, but to build further APIs for more advanced banking functions such as instant SEPA transfers, for example. Third parties would have to pay to access them to get the benefits of the instantaneity.

The additional revenue opportunity around APIs isn’t the only upside for banks. While PSD2 means that they have to open up their customer data to third parties, it also means that their competitors have to do the same thing.

What banks should really be doing if they want to maximise the advantages of the new regulation is to look at how they can leverage it to launch differentiated offerings from their competitors and as a result to acquire customers from their rivals. These differentiated offerings could be developed by the banks themselves or the banks could seek to build a developer community around their API portal, incentivising them with revenue and recognition mechanisms.

Using the APIs that their competitors are obliged to provide, banks can build innovative financial services and products aimed at winning over new customers. Digital experiences that delight customers, as well as anticipate their needs. Whatever these services might be, they can act as a door opener — bringing a consumer on board, while also priming them for upsell opportunities.

Through partnerships with the exciting new fintech startups, banks could provide a one-stop shop for customers where they can access any kind of financial service that they could require — loans, mortgages, credit cards, insurance, overseas money transfers, peer-to-peer payments, accounting software, budget planners — the list is endless.
The bank can play host to all of these separate products, retaining the customer’s attention and promoting their own brand, even if the service being used has little to do with their bread-and-butter business.

The key to building these highly personalised experiences revolves around how banks can harness and use the data at their disposal. Of course, established banks have a lot of data already, but most of them aren’t doing much with it right now. Legacy core IT systems and siloed organisational structures mean that this data is often difficult to mine, but if banks want to take full advantage of PSD2, then they need to get their back end sorted so they can properly harness data.

Data is gold — it will provide the banks with the insights that will enable them to create optimised experiences. So much can be learnt from the behaviour of customers en masse and as individuals by effective data mining, so the new regulations need to serve as a wake-up call. Turning PSD2 to their advantage will require a bold strategy from the established banks, but it will pay dividends.
But if they can’t capture and use the data they have at their disposal, they have little chance of winning in the age of open banking.

Sophie Guibaud is Vice President of European Expansion at Fidor

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