13 January 2018 marks a critical day in the European banking landscape. It’s the date on which all EU Member States will incorporate the EU’s new payment service directive (also known as the Second Payment Services Directive, or PSD2) into their respective national laws.
PSD2 sets out a common legal framework for businesses and consumers making and receiving payments within the European Economic Area (EEA). It is, in effect, the driver for a new era of open banking, wherein banks will be required to implement secure APIs for account transactions and data available to third parties.
Just survive, or thrive, in the open banking era?
With PSD2, I’m seeing established banks finding themselves at a crossroads. They can choose to adopt digital banking technology and open up new revenue streams by becoming an end-to-end service provider for account information, payments and value added services. Or they can become a utility service provider supporting other service providers. If they choose the latter, they risk missing out on their transactional income as new players take a bite out of the payments pie.
More than that, although PSD2 will only affect current accounts and credit cards in the first place, that’s only the start. In time, open banking principles will be applied across other core banking products, such as loans and mortgages.
Bearing this in mind, I believe that taking the digital banking route and starting on the journey to becoming an end-to-end service provider becomes the clear choice. After all, established banks already own a large amount of data and information about their customers – information that new market entrants have yet to amass. They can leverage that unique insight to offer wider transport, entertainment, and other personalised services, and add enormous value to their digital banking solutions.
Keeping digital banking customers close
Various surveys, including those from Fortune, TechCrunch and PWC, have found that although typical smartphone users have between 20-25 apps on their devices, they only tend to use five or six of them regularly. In fact, their digital banking app is one of the apps they use the most. Although they may spend less than a minute there (checking their balance, for instance), it’s somewhere they regularly go. This gives banks an opportunity to connect with their customers on a regular basis.
However, if customers turn to the new fintech players instead – the likes of NerdWallet, Money Dashboard, Digit, Bud or Varo Money – traditional banks will lose direct interaction with their customers. While these new players offer customers unique services, they don’t yet have that deep understanding of their customers, and customer loyalty is still being built up.
With another PwC survey finding that six in 10 UK financial services firms believe up to 40% of their revenue is at risk of being lost to standalone fintech firms, I can’t emphasise enough how important it is for traditional banks to act now. If they don’t, they won’t be able to ensure that their long-term customers will remain loyal.
Embrace PSD2 with an API-led partner ecosystem
I firmly believe that UK banks must embrace PSD2 as an opportunity to open up new revenue streams and get closer to their customers. But I also understand that a transformation to digital banking is an enormous undertaking. Transforming legacy systems for the new era is too much for any individual firm to attempt on its own. But there are partners available to help. The key is not to try to do everything in-house. Instead, build an API-led partner ecosystem and choose an experienced technology partner to help manage that ecosystem, and create an integrated digital banking solution.
There are tools available too: digital banking platforms that can act as a layer between your legacy world and the API-led world of open banking. You have the customers. You own the data. You have the insight needed to create the tailored offerings that today’s customers are demanding. You have a head start, but the new players will quickly catch up.
Take the opportunity you still have available to you today and start working on your open banking strategy before it’s too late. If you don’t, you may find yourself supporting, rather that being, a key player in the open banking era.