PSD2: Banking Without Walls

Earlier this year I wrote about open banking , the opportunities it brings to financial services, and my belief that the competition and innovation enabled by new regulation in this area will drive a revolution in customer experience and a new emotional connection to banking.

Since then, the Payment Services Directive (PSD2) has received parliamentary support and has been passed to the European Union for official endorsement. PSD2 sets out to standardise, integrate and improve the efficiency of payments within the EU – offering consumers better protection and service through innovation and cost savings. The directive facilitates competition in the payments market, which will mean more options and better value for consumers.

The directive requires banks to share their customers’ data with anyone that holds the required licence. I cannot emphasise enough that this is a big deal. Opening up this data brings new opportunities to existing players, and lower barriers to entry will enable new suppliers to enter the banking and payments scene. Likely candidates are applications that aggregate multiple accounts, facilitate comparisons between products, allow you to switch accounts at the touch of a button, or apps that make payments and “do your banking” without going near your bank. Anne Boden’s Starling Bank summed these changes up well (and with humour) in its blog Explaining PSD2 without TLAs is tough – I recommend you take a look.

Countdown to better customer experience

PSD2 has received a lot less mainstream attention than it deserves. This is the single most revolutionary change that has happened in recent times in the banking industry, and the result will be an unprecedented change to customer experience. Now is not a time to bury heads in the sand – traditional banks need to consider their position and response. When the EU gives its approval (and it will), banks will have just two years to comply. Many banks will suddenly find themselves bogged down in the task of meeting compliance by making their legacy systems compatible – but this is just the distraction that could mean they miss the larger point.

What does PSD2 mean for banks?

There are two ways traditional banks could react:

Take a step back from the customer and allow their infrastructures to facilitate transactions, while consumer brands (such as Apple, PayPal or new players) engage with customers directly.

Use their scale and brand to adopt open innovation approaches and create enhanced, customer-focused packages to sit alongside standard services. These additional services would become revenue streams that fund further innovation and commercial growth.

Which approach is best? It depends on what kind of business you’re running, but here are some considerations.

Is your brand trusted to look after people’s money and identities? Is it also trusted to provide the best products and experience?

Are your customers emotionally connected with you?

How do you differentiate yourself? If your answer is “service”, can you articulate exactly what this means and is it genuinely perceived by customers?

How strong is your organisation at building compelling experiences in a digital world, relative to the class-leaders?

What part, if any, do your products and services play in distinguishing your brand?

Is customer-led innovation a core competence and pervasive in the culture of the organisation?

Does your business have the scale, resilience and operating model to process transactions reliably, quickly and at low cost?

Do you partner with smaller, newer companies to offer alternative products that complement your own (e.g. alternative funding services)?

Is your B2B team clear on the impact of PSD2 and already negotiating the necessary commercial partnerships to leverage a new position opening up

Are tools and systems (not just IT) encouraging agile and empowered decisions?

How are you managing your relationship with the regulator today, and how do you plan to invest in this relationship in a post-PSD2 world?

Learning from our peers

PSD2 echoes the “Local Loop Unbundling” regulation change in the telecoms industry back in 2000, when the communications watchdog forced BT to open its exchanges to competitors for the first time. At first the effect was negligible, with a few competitors springing up, but none that posed a real threat. Over time, though, the regulation change had a massive impact, as a more competitive broadband telecommunications market emerged and organisations had to fight harder to attract and retain customers. Quality increased and prices decreased. BT faced previously unknown challenges, and after some difficult years it eventually came back with a compelling service offering. It now faces a new challenge in light of Ofcom’s plans to force it to open up its fibre-optic network in April 2017.

PSD2 could bring similar disruption for the banking sector. Without a clear strategy now, banks are going to be hit hard by competitors who already have the user experience nailed. Only those with a clear vision of who they will be in this new landscape, and a strategy to get them there, stand a chance of holding their ground while the industry finds its new plateau. It is a time of shifting perceptions, monumental changes and experimentation. For some banks, this is where Heads of Innovation are now proving their value – slowly but steadily influencing the cultural and leadership changes needed in a post-PSD2 world while creating the new partnerships and platforms for innovation to grow and thrive.

Customers set to win out

The potential customer benefit from the regulation is what makes this story so compelling. If Midata opened the doors to more competitive banking, then PSD2 has taken down the walls and removed the roof. PSD2 will offer customers a greater choice of services, together with a means of comparison to understand their options and make the best choices.

Midata promised customers the opportunity to compare accounts, and the 10-day switch guarantee made it easier for customers to move to a new bank. But it didn’t happen. It is still too complicated to uncover meaningful differences between providers and accounts. PSD2, however, promises much greater innovation, adding a level of transparency in payment and account services, which will mean that banks have to differentiate themselves and compete in a very different market and with a very different strategy. In this new landscape, the customer will have more power and drive bigger change – forcing banks to deliver customer-centred innovation and more personalised services. How the services will look remains to be seen, but one thing is sure: customers will win from the changes driven by this regulation.