How PSD2 will change the game and what banks should do to stay in the game.
When Bill Gates proclaimed in 1990 that “banking was necessary, but banks were not” he might have been ahead of his time. Now, almost 30 years later, his proclamation holds true in Europe more than ever. 2018 will be the game-changing year for traditional banks due to PSD2, the revised Payment Service Directive. “The new EU directive opens the door to any company interested in eating a bank’s lunch” (Viola Hellström, Evry). This article will briefly explain what P2D2 is and what it will mean for traditional banks. But this is not just a bad news show for the traditional European banks as we know them. If they choose to embrace Customer Centricity they will not only stay in the game, but ahead of it.
What will change with PSD2?
The new directive, which regulates payment services in the European Union, will open up financial markets to non-bans. These third-party providers will be able to enter a financial market without the need for a banking license. This means that banking customers can turn to third-party providers to manage their finances, while still having their money deposited in a traditional bank account. Upon the customer’s request, banks are obligated to provide third- parties access to their account using APIs or Application Program Interfaces (software that runs in the background to allow communication between two independent applications). As a result, third-party providers will also be allowed to initiate payments directly on behalf of a bank’s customer.
What will this mean for banks?
First of all, banks will have to provide the APIs, giving third-party providers access to account information, while guaranteeing the security of their customers’ data. Secondly, the implementation of PSD2 will mean that we will see even more FinTech (start-ups), which will act as third-party providers and enablers of financial services. This trend has already caught the eye of big tech companies such as Facebook, Google, Amazon or Apple who are likely to enter the game with integrated, user-friendly digital wallets and payment services. In China, where the financial market is already open to non-banks, WeChat (Facebook’s equivalent) has been providing loans to customers for years, based on social network history to determine creditworthiness.
With the opportunities PSD2 offers to new players, we will see the rise of new business models with innovative account and payment services, better integrated and combined with extra services such as online identification, smoother online purchases, detailed expenditure reports, and so on. The traditional banks may have the advantage of already having access to a lot of customer data as well as already having an established trust relationship with customers regarding their finances. However, if they don’t step up their game and rethink what banking means they threaten to lose contact with their customers.
What should banks do to stay in the game?
Many traditional banks are scared of what the future might bring and some have even taken legal action against third-party providers who were offering services before PSD2 was implemented. When you consider that most traditional banks lag behind on FinTech (start-ups) in terms of innovation, they should be scared. Some European banks, however, have already turned this threat into an opportunity by incubating FinTech start-ups themselves, giving them access to new technology and ideas. Likewise, some banks have created their own app store to let FinTech start-ups innovate services around their data to improve the customer experience.
Yet, acting as an incubator or creating an app store is not enough. Banks have to provide customers with new services and experiences directly. These services have to be adapted to the customer’s way of living and not the other way around. Openbank (Grupo Santander) and BBVA in Spain are a few examples of Banks who are already offering such a service. It is important to keep in mind that great new products and services will not magically unveil themselves. It takes a true outside-in approach where the customer is put at the heart of innovation efforts. This also means that Banks will have to better understand their customers if they want to come up with innovative ways to cater to their needs. This involves not only doing more behavioural and contextual research to gather insights into what customers need and want, but also involving customers in workshops to co-create the future of banking.
Large corporations are often prompted to be more like start-ups, as start-ups are thought of as inherently flexible, because they are not hierarchically structured. Yet, another - perhaps more important - reason why large corporations need to be more like start-ups, is that they are typically closer to their customers than large corporations. There is no administrative wall shielding decision-makers from the end-user. In other words, PSD2 forces banks to pursue customer intimacy. If customers find that other non-banking providers offer a better service, they will simply be able to switch. This means that piece by piece, non-user- friendly aspects of financial institutions will be replaced. Gates had it right almost 30 years ago, banking is necessary, but banks are not. Remember, though, that banks have a huge advantage over FinTech start-ups in terms of network and customer base, which reduces the complexity of testing new ideas and speeds up the process of user adoption. If banks accept PSD2 as an opportunity instead of a threat and fully turn to Customer Driven Innovation, they will not only stay in the game but be ahead of it.