How banks can avoid becoming 'dumb pipes' with the PSD2

'It feels like being on a tech board… one that is under siege by a thousand piranhas that are chipping away at various business lines and profit centres.'

That’s how a board member of a U.S. super-regional bank responded when she was asked what her role felt like today, at the 2015 MIT CIO Symposium. Fast forward a year and across the pond, I’m not sure the response we’d get from European financial services board members would be fit to print in a family publication.

What the PSD2 means for Fintech

On top of the threat posed by hundreds of Fintech companies attracting billions of dollars in venture capital, the European Commission has issued a wide-ranging directive on payment services: the 'Revised Directive on Payment Services', or 'PSD2'. The directive requires institutions to provide access to account information to third parties through Application Programming Interfaces (APIs).

The Economist describes the implications as a potential 'field day' for account-data aggregators aiming to suck account information from multiple banks into an app. However, it also warns that 'Banks could become mere ‘dumb pipes’ unless they lever their brands, client bases, and compliance skills to become aggregators of choice'.

Moreover, it mandates open access for new types of 'payment providers' such as money remitters, retailers and phone companies who want to get into the payment services game.
It would be perfectly rational to feel that regulators have forcibly cut the locks that protected banks’ 'crown jewels' — and then chucked them into the piranha-filled pond. But it’s not the shrewd reaction.

The digital revolution

In reality, banks need to recognise the golden opportunity in front of them to accelerate the digital journey their institution ought to undertake. Not for the sake of compliance, but rather for the sake of growth.

Digital is driving a platform revolution, as exemplified by companies like Uber, PayPal, and Airbnb. But the power of platforms isn’t just for these digital natives. For example, Visa offers 'The power of the Visa Network, delivered as an API'. Then there are telcos that use APIs to move from 'pipe to platform' and develop new services including, in some cases, banking services.

For institutions that get their API infrastructure and growth strategy in order, every fintech start-up is a potential asset to their ecosystem that can complement — rather than cannibalise — its core.

PSD2 might change the timing and preclude some options for financial institutions once they embrace the use of APIs and go from 'pipe to platform' as a growth strategy. As one of the most highly regulated industries on the planet, it might be hard for many to greet the prospect of more rules with open arms.

But if an institution has been hesitating to 'get in it to win it' and build a digital platform, PSD2 offers a powerful opportunity to start doing things differently. Financial institutions have the chance to go all in and excel at creating the new experiences now possible in the new digital market context - and do them superbly.

As Winston Churchill advised, 'Never waste a good crisis'.

(And, for the record, I’ve eaten freshly caught piranha -- it’s quite tasty)

Bryan Kirschner, Director at Apigee Institute