Regulations often hinder innovation rather than boost it, but PSD2 could radically change the relationship between banks and consumers — one where trust is everything.
It sometimes feels like the banking sector is more familiar with talking about disruption than experiencing it. Despite the hype and enthusiasm surrounding fintech, digital transformation has so far failed to make a meaningful mark on consumer services. Mobile banking was introduced nearly a decade ago, yet retail banks still believe merely having an app highlights how innovative they are. The time has come for real change in banking services.
Being responsible for the savings of millions of consumers tends to make organisations risk averse. Financial institutions want to be seen as modern, but they’re forced to approach innovation with iterative steps, rather than the great leaps and strides that mark real progress. This has become a persistent problem for the UK’s biggest banks, and it’s about to get a whole lot more urgent as open banking comes into effect.
The new open banking environment allows consumers and SMEs to authorise third parties to access their account information through open application programming interfaces (APIs). When Google Maps opened its APIs to developers, it created an explosion of new applications. Startups such as Deliveroo and Uber — valued in the billions — were suddenly made possible. And the same is about to happen to banking services.
“At its simplest, open banking APIs makes it much easier to view several accounts from different banks within a single app or website,” explains Imran Gulamhuseinwala, global fintech lead at Ernst & Young and implementation trustee at the UK’s Open Banking organisation. “Across the finance industry, the internet is transforming consumer expectations. Open banking is about more than keeping regulators happy. There’s a very real commercial opportunity to make the financial infrastructure more efficient, more flexible and better able to serve customers.”
New efficiencies that lead to cheaper current accounts, mortgages and credit card rates should be applauded, but they’re incremental changes rather than the revolution that fintech evangelists have been promising. The real innovation will come when firms can use account aggregation to deliver entirely new products and services — that’s when consumers will start to see major changes in retail banking.
In 2015, more than 80% of personal current accounts were held by the UK’s ‘big five’ retail banks, but their market dominance is fading. A combination of legacy IT systems, regulatory change and costly real estate have bogged down the incumbent banks and created an opportunity for challengers to thrive. According to PwC, the 10 largest of these challenger banks now serve more than 20 million customers. And they’re gaining momentum by focusing on individual services rather than trying to compete on all fronts.
The introduction of the Payments and Services Directive (PSD2) in January means that challenger banks now have unprecedented access to data that was previously locked away by the ‘big five’. Over decades, these institutions have evolved into enormously complex beasts that fulfill five core functions: settling payments, performing maturity transformation, sharing risk, and allocating capital.
At Nile, we’ve been working with challenger banks to identify how they can use this new access to streamline existing banking services. In April, we joined Ulster Bank’s Bank of APIs Hack at Dogpatch Labs in Dublin. We found that the most common mistake was to focus too much on the technology and forget that success ultimately depends on the customer experience.
“There’s a divide between the hype and reality in the work we’re doing. On the one hand, clients and design teams are excited by the possibilities of PSD2, but they’re still largely focused on meeting the core regulatory milestones,” says Neil Collman, practice director at Nile.“In a similar way to GDPR, some customers understand PSD2, but don’t really know how to make the most of it. We’ve been using service design to help those clients get closer to the customer perspective and develop strategies that build trust.”
Bank of England Governor Mark Carney believes the unbundling of services is the critical opportunity fintechs have to grasp if they are to propel the finance sector into a new era of innovation and prosperity. But if challenger banks are to succeed, they mustn’t forget that the most sophisticated technologies in the world won’t mean a thing if they can’t be trusted by consumers — and right now trust in digital services is at all time low.
In the new era of open banking, financial institutions are increasingly thinking of themselves as data companies. But at a time when controversies like the Cambridge Analytica scandal are rocking even the world’s most popular tech companies, banks will need to provide meaningful incentives if they expect consumers to consent to share their data. A survey by Accenture found that more than half of UK consumers say they will never change their existing banking habits. So open banking has some challenges ahead yet.
It seems unlikely that PSD2 will be the revolution some hoped it would be, but the landscape will begin to shift — albeit gradually. Open APIs will create fresh opportunities to integrate innovations such as blockchain, biometrics, and artificial intelligence and enable them to become part of the industry’s daily operations. New entrants will find it easier to compete with and even outperform larger organisations with a narrower focus on providing consumers with new products and services. The key will be winning their trust.
Here at Nile, we design experiences that help organisations deliver value to their customers. Contact us today to find out how we can help you prepare.