or wait 15 seconds
or wait 15 seconds
by Laura Crozier, CFA, Global Industry Director, Banking at Software AG
At the beginning of 2018, a new era of digital banking in Europe was born with the first phase enactment of Payment Services Directive.
In a nutshell, PSD2 enables the democratization of customers' data and payments. EU banking customers can direct their bank to share their data with third parties and can direct third parties to initiate payments directly from their bank account.
So far, we have not seen any dramatic changes in customer or bank behavior. This will likely change in September, when the next phase of PSD2, which requires two-factor authentication, comes into force.
As more opportunities for open banking hit American shores in the near future, however, the tide will most definitely turn. Just as the GDPR privacy rules informed California's own privacy law and the debates around the topic occurring in Congress recently, PSD2 will impact financial institutions' approach to innovating their data and fight for space in what McKinsey forecasts will be a $60 trillion digitally distributed consumer economy by 2025.
Many financial institutions have long been hesitant to share data with third parties, even if their customers wanted them to do so. The relinquishing of control over customer data, their customers' banking experiences and their money created more than enough worry among banks to avoid partnering with fintech companies over the years.
However, many financial institutions are realizing that fintechs are a much smaller threat than the potential for the likes of Amazon, Apple and Google to gain traction as big fintech players. These big tech companies are using the power of their customer analytics and excellent user experiences to pick away at traditional banking products.
It's only a matter of time before customers demand more personalized services that offer everything from real-time interest rate management, real-time spending and budgeting tools or improved self-employed worker banking products.
Banks have to examine very closely the value they deliver or they risk becoming disintermediated from their customers and serving as back-end utilities to more nimble customer-facing digital competitors.
The key to succeeding in open banking is data. Whereas in the past, banks were monoliths completely focused on keeping client data safe inside, banks now have to share data with the outside — and their future will depend a great deal on how they use that data to generate new revenues.
Take, for example, buying a home. Even before a customer applies for a mortgage, the bank could act as a trusted advisor through its mobile app to help the prospective homebuyer plan for success.
Closer to the time of purchase, the bank could introduce a series of partners to the customer: realtors; lawyers; insurance companies; movers; school advisors; landscapers; as well as a mortgage approval tool. The value to the customer is redefined as engaging in a home buying experience – not just getting a mortgage.
To prepare for open banking, banks must make sure they are ready to share data, have an intimate understanding of each client's behaviors and can deliver real-time, dynamic, contextual and scalable experiences. To make the most of all that open banking has to offer, banks should follow the following best practices.
Optimize and monetize APIs —Data sharing is often accomplished through an application programming interface. It's vital that banks build, manage and publish well-secured APIs to partner ecosystems that enable authorized access to data and services.
By controlling the flow of data through open APIs, banks can mitigate competition risks and at the same time offer customers a wider and more easily customized set of services.
In fact, according to the World Retail Banking Report 2017, more than 78 percent of banks seek to leverage APIs to improve the customer experience. Of note, open API platforms should be scalable and provide the ability to track and measure monetization.
Create new open banking offerings —Banks need to ensure that they can use their customers' data to generate new revenues as opposed to letting fintech upstarts reap all the benefits.
One way they can do this quickly is to find ways to integrate and bundle external financial services offerings within the bank to create new "best-of-breed" products and services.
Collaborate with fintechs —As mentioned above, the greatest threat to traditional banks in the upcoming open banking era is not the fintech startups, but the current Internet and technology powerhouses like Google, Amazon and Apple that are developing their own products to service their current customers' financial needs.
The best things banks can do is to partner with the next wave of fintech innovators to create advanced financial ecosystems that would better service customers.
Open banking represents a huge opportunity for financial institutions. By creating ecosystems to develop new customer propositions and generate new revenue streams, banks will be better able to compete with third-party players and big tech like Amazon.
Financial institutions must open themselves up to the broader digital consumer economy before a maverick like Amazon storms in to further disrupt the market.
Laura Crozier is the global industry director of financial services at Software AG, an independent integration, Internet of Things, analytics, process software and services company.