With the introduction of PSD2 (the second Payment Services Directive), we are now entering a new era of open banking. At the customer’s request, EU member states will be forced to open up their customer data and payments infrastructure to third-party providers.
The regulation is set to shake up the banking industry by allowing businesses not traditionally associated with finance - such as tech and telecoms firms - to provide services usually offered by banks. Most importantly, individual banks will no longer have monopoly on their customers’ data. Technology and legislation is opening up the market, creating a more competitive environment where customers can find the best deal for them.
This is a huge and highly complex change for the sector. And with so much scrutiny and theorising about what this will mean to the industry, we have listed the top three myths surrounding PSD2.
The shape of the industry will change dramatically, but forward-thinking banks who embrace the change will enjoy first mover advantage. Indeed, early adopter banks can be the heroes and reap the commercial and reputational benefits of delivering a better service to their customers. Those that don’t embrace the opportunity will find their consumers go elsewhere to enjoy more competitive products. Key to success will be to reshape their products according to customer needs.
Customers now have a huge range of personal finance management options to choose from - but rarely are these offered by their banks themselves. Offering them in-app will help ensure continued bank use and ensure the bank keeps up with competition from third party actors.
Investing in the technology and the power to innovate via partnerships with fintechs will allow banks to be winners in the new world order. Yes, the banks will face greater competition from all sides, not in the least when consumers could start to manage their money on platforms such as Facebook or Amazon.
But at the same time, the open banking era will encourage greater collaboration between fintechs and the traditional banking sector as they both wake up to the enormous opportunities that lie ahead. Automation and personalisation will create a revolution in customer experience. Customers will be nudged towards choosing the products best suited for them, regardless if it’s a better mortgage deal or savings account rate. Looking further ahead, we will also see consumers giving their providers the power to automatically switch them to the best product. Managing money will be frictionless and effortless.
Technology is well ahead of the legislation. A number of fintechs have already been accessing and aggregating this data for years through reverse engineering or screen scraping banks’ APIs - at their user’s request.
Legislation is now playing catch up with technology. For some savvy financial services providers the new directive is little more than a legal rubber stamp for tactics they have been using for years to deliver a better service for users. The difference is that PSD2 officially puts rightful ownership of data in the hands of the individual and enables customers to compel banks to share this data with third parties. But this is also a huge opportunity for the banks who get it right - helping them to build loyalty and increase the range of financial services for their clients.
But with regular stories of data hacks hitting the headlines, it’s no surprise that some consumers are feeling a little nervous about sharing their banking data with third parties. However, stringent measures are in place to protect customer data and fintechs and other third parties are subject to the same scrutiny and compliance requirements as banks. Any third party wanting to participate in open banking will also need to be authorised to do so by the FCA.
With banks under pressure from third party actors and consumers who can now easily chose to bank with providers that give them a better solution, PSD2 is an opportunity to come out as a winner for those who dare to innovate. As technology and legislation open up the market, we will see a more competitive environment benefiting both consumers and banks.
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