On 14 September 2019, the Payment Services Directive 2 (PSD2) comes into effect. This means that banks will be obliged to have developed and provided access to their own APIs, and to – with a customer’s consent – facilitate access to customers’ account information and funds by Third-Party Providers (TPP). No, this doesn’t mean that any third party can just take your money without your knowledge. It does, though, mean that – with your consent – a provider of a good or service that you have ordered can receive payment from your account without the need for you to take out your credit or debit card, or access your banking app. For banks, this is a major change that has the potential to shake up the industry. Some banks are better prepared than others. For consumers, the introduction of PSD2 potentially opens the door to a revolution in the way banks, service providers and retailers interact with their customers. Marzena Sokołowska, Banking Services Product Manager at ITMAGINATION, explains what PSD2 means for banks and service providers, and how they can embrace and thrive in the era of open banking.
The introduction of PSD2 means that banks will be obliged to develop and provide access to fully functional APIs that enable FinTech companies and other Third-party Providers (TPP) to access – with a customer’s consent – records and funds from a customer’s bank account. In turn, these TPPs will be obliged to maintain the security and confidentiality of any data that they access. At the time of introducing the PSD2 directive, Jonathan Hill, the EU’s Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union, said:
“European consumers want to know that their payments are safe when they shop or make a payment online. The new Payment Services Directive will ensure that electronic payments in Europe become more secure and more convenient for European shoppers. This legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow.”
PSD2 could represent a turning point for the personal banking sector
This is a crucial moment for banks. By making their APIs available to third-party service providers, they potentially expose themselves to increased competition from aggregators and start-up bank ‘challengers’. Many of these potential rivals are ‘born-digital’ recent market entrants that are not weighed down by legacy infrastructure and technology. They think differently and are able to bring new, innovative, value-adding services to market quickly and relatively cost effectively. On the surface, it might sound bleak for banks, but it’s not all bad news. Those banks that are committed to innovation and change have the opportunity to put themselves at the heart of a new customer experience, one in which they’re able to provide more value to customers by facilitating transactions with more partners and by providing a new level of personalized services.
Are banks ready to fight for their customers?
The banking sector has been notoriously slow to innovate and put customers first. Administration fees, uncompetitive exchange rates, queues at branches, web and mobile experiences that trail far behind the slick and convenient web and mobile experiences we enjoy from other service providers … it all makes for a rather cumbersome customer experience. It’s little wonder that new entrants to the personal finance sector have enjoyed so much success and so quickly. Customers want change, and PSD2 could serve as the perfect enabler to this change.
PSD2 presents a series of challenges and opportunities for banks. An obvious challenge is that banks are forced to comply with PSD2, and compliance requires serious investment in ensuring the technology (the API) fulfils its intended function and is secure. There are concerns about how well banks are faring in this regard. Tink, a provider of digital services to banks, FinTechs and other companies operating in the financial sector, has conducted a series of surveys and studies to track how banks are progressing towards compliance with their PSD2 obligations. It doesn’t make for encouraging reading:
- 41% out of 442 banks sampled across 10 markets failed to meet the 14 March deadline to provide a testing environment or ‘sandbox’ to Third-party Providers (TPPs).
- Across 12 markets, only 69% of major banks had made their APIs available in production environments.
- None of the tested bank APIs released by the penultimate 14 June deadline meet the quality requirements laid out by PSD regulators. The 14 June deadline was intended to allow TPPs three months to integrate.
All of this indicates that banks are struggling to adapt to the age of open banking.
But compliance with PSD2 is only the first step
But even once compliance with PSD2 is achieved, banks can’t simply expect business to carry on ‘as usual’. One of the key aims of the PSD2 is to create a “digital single market” across the EU. This will open up new markets, but it will also create competition. In this way, the introduction of PSD2 has forced many banks to open their minds to new ideas and to build ecosystems and forge partnerships with entities that – in some cases – have a very different culture and DNA than their own. For many banks, this type of new thinking is needed, especially as they now face the prospect of competing with the big 5 global tech giants: Google, Amazon, Facebook, Alibaba and Apple (GAFAA), as well as pseudo bank startups like Monzo, Revolut and Starling. This is a good thing for customers as it promises to inject innovation into a sector that has been behind the times for far too long.
How can PSD2 improve the way banks serve customers?
The introduction of PSD2 and the obligation to provide access to customer’s details and funds could be just the start of a banking revolution. If they’re not already doing it – banks can and should be making use of technologies like Artificial Intelligence (AI), deep learning and both behavioral and predictive analytics to put their customer at the heart of a new type of customer experience – the micro-personalized experience.
Most of us know what it’s like to receive a special offer from a bank. They come via direct mail, email, or when we log onto the online banking platform or mobile app. But are they ever personalized? We get information about new savings accounts, loans, overdrafts, credit cards and much more. But most of these offers are about what the bank wants to sell you, rather than what you actually need. And they typically arrive in line with the bank’s marketing calendar – not in line with the emergence of your needs. With the GAFAA tech giants – masters of the personalized service – lurking, banks need to ditch the scatter-gun mass-marketing tactics and up their game. They need to get personal and they need to be more relevant for their customers. The alternative? Risk the threat of extinction.
The advent of PSD2 – combined with the use of the latest technology – provides banks with a wealth of opportunities to improve and broaden the range of services they provide to their customers. And, perhaps most importantly, it means that banks can address customer needs as and when they occur or even before. The formula is simple:
Personalized Offer = Data + Data Analytics
Imagine the following:
- You pay for your holiday using your debit card or bank transfer. Your bank recognizes the payee and, with the help of artificial intelligence and its partnership with leading travel insurance providers, sends you a preferential offer on travel insurance.
- You’re looking for a mortgage and are evaluating several banks. In the past, each one would want to see your pay slips, details about your monthly costs and more. Imagine if you could provide access to your transaction history in just a few clicks, thus saving you time and work, and enabling you to get responses back more quickly from each bank.
- Knowing that there is a significant gap between when you get paid and when you typically pay your bills, your bank advises you to move funds to different savings accounts to ensure maximum interest gains. Or, it sends you reminders to pay any overdue bills immediately after your salary is paid into your bank account to help you avoid being charged late-payment fees.
- Equipped with information about your earnings and dependents, and being able to compare your mobile phone bill to other people with similar demographic profiles, could your bank work with mobile phone operators to negotiate a preferential deal for its customers and save you money?
Note: For more on the opportunities for banks and retailers, check out the ITMAGINATION blog post on micro-personalization in banking
So, whether it’s directly through the bank or as a result of the bank creating useful partnerships with third-party service providers, the introduction of PSD2 and the increasing maturity of technologies such as AI, Big Data and behavioral and predictive analytics means that there are plenty of opportunities for banks to become more useful and relevant to their customers.
How can ITMAGINATION help you prepare for, and thrive, in the age of open banking?
ITMAGINATION can help banks and third-party providers thrive in the age of open banking. We specialize in custom software development for banks, financial institutions and FinTechs, and we have amassed rich and diverse experience across the retail and ecommerce sectors. ITMAGINATION has developed its proprietary PSD2APIHUB, a tool that aggregates information, such as transactions, across multiple different bank accounts and presents a unified view. We’ve also built our Behaviolytics® platform to analyze consumer behavior in real time. These proprietary solutions empower ITMAGINATION clients (such as banks, financial services providers and retailers) to anticipate customer needs and prepare personalized offers (Next Best Offer) or alternative recommendations (Next Best Action), in real time, without ever leaving the customer waiting longer than they need to.
If you want to empower your business to thrive in era of open banking, talk to ITMAGINATION.
Author: Marzena Sokołowska
Learn it. Know it. Done.