Amid the ongoing debate about the revised directive on payment services (PSD2), one issue that has gone largely unreported is the fact that many banks in the UK would rather not have had to deal with PSD2 at all.
On the face of it, PSD2 represents a threat to banks’ ownership of their customer relationships. PSD2 compels banks to open up access to accounts and decouple retail banking from easy access to money through the existing mechanical linkage to payment services. Naysaying banks worry that these requirements will at best disconnect them from their retail customers; at worst, they fear being put at the disadvantage of becoming commodity sources of account processing and credit lines.
If PSD2 was a worry, the hand of UK retail banks has now been forced as the Competition and Markets Authority’s (CMA) suggested reform will steamroller the industry to progressive banking. In its final report on the UK retail banking industry the CMA concludes that older and larger banks do not have to compete hard enough for customers’ business, and that smaller and newer banks find it difficult to grow - to the detriment of customers. It highlights the need to accelerate technological change and the expectation is that UK retail banks will have implemented Open Banking by 2018.
Don't bury the PSD2
Given that until recently PSD2 – a directive devised by the European Union – was inevitably going to form part of the UK banking regulatory environment, those banks would still have recognised the need to do at least the minimum they could get away with to tick the boxes for compliance with PSD2. UK banks may have seen Brexit as an opportunity to bury it below the myriad other priorities they will have to deal with in the coming months and years of uncertainty, but the CMA has put Open Banking firmly back on the priority list.
UK banks can’t afford to be complacent any longer. If you look at the competitive landscape, there are notable banking groups that even today have operations (and licenses) in both the UK and other EU member states. Given that any such EU-anchored bank would have to deal with PSD2 anyway, it would only take one or two progressive CIO/CMO combinations to double down on implementing PSD2 in order to reap the potential strategic benefits of creating better customer experience and originating new revenue streams. This could create a banking force that would pose a significant threat to parochial and fence-sitting UK-only banks.
A banking force to be reckoned with
Progressive operators will look at PSD2 and think of the old axiom that 'every threat is an opportunity'. Take XS2A (access to accounts): this doesn't only mean a bank having to provide customers with direct access to their account data; it can also empower the bank with a greater knowledge of their customers’ wider banking (and, with some thought, non-banking) behaviour. Add a sprinkle of features from key industry and technology partners and it should be easy to imagine creating all sorts of genuinely compelling new customer propositions.
This is what customers expect and want these days. They don't want 'more bank stuff', they want to easily and seamlessly use whatever they have at their disposal to allow them to do whatever it is they do each day. Whether that’s signing up to Netflix, switching cable providers, paying for bike hire, or going on holiday without having to worry about spot foreign exchange rates, banks will find themselves increasingly close to the sweet spot of opportunity to help customers do all these things.
The CMA reform will force banks to take the initiative: perhaps finding solutions for easier comparison services, payments, better insights into everyday spending, cross selling and up-selling. This is likely to improve communications between banks and their customers, benefiting from better and more frequent communications, through being compelled to send out suitable periodic and event-based ‘prompts’. This could be as easy as notifying a customer that they are about to be overdrawn on their current account, or notify them that their current fixed mortgage interest rate is coming to an end, allowing the customer to make informed decisions on their next steps. This all gets much easier when UK banks open up their APIs to allow trusted 3rd parties to access customer data with their permission.
Imagine a banking group that already operates in a mainland EU member country, that is not only committed to PSD2 on paper but has also fully embraced the opportunities it represents. Imagine they have a visionary CIO, CDO, CTO, or whatever it takes to ensure that the right technologies and partners can be brought together to build propositions that make this a reality. It makes little sense for them to invest in building one system per country. It is more likely that they will strive to build a unified platform capable of delivering customer-centric services throughout all EU member states in which they operate.
Now imagine they also have operations in a post-Brexit UK in which, for some reason, PSD2 has been either watered down or broadly ignored by the regulator and allowed to wither on the vine. UK banks simply aren’t yet ready to face up to the challenges posed by the EU-anchored bank that is already capable of operating in the UK and has the experience and technology to drive genuine innovation into the hands of (by then) eager customers who are ready and waiting to switch banks in an instant.
But how likely is it that this scenario actually plays out? In my view, very. There are some banks in the UK who will definitely do the bare minimum to comply with PSD2, irrespective of whether or not its local relevance is affected by Brexit. This will quickly put them at risk. Rather than waiting to see the longer-term fallout of the referendum result, UK banks should be urgently embracing the opportunities presented by PSD2 and the CMA’s reforms. All it will take for UK banks to lose customers overnight is one EU-anchored banking group leaping ahead as a result of their own inspired response to PSD2.
PDS2 and the CMA reform do not overlap completely and UK banks may remain bound to PSD2 implementation even if Article 50 is invoked tomorrow and leads to a quickie divorce. The UK could remain within the European Economic Area (EEA) where PSD2 will also be in effect even though banks may try to ignore or downplay its regulation.
Either way, UK banks mustn’t rest on their laurels. The reforms are promising for the future of banking and getting the basics right and fixing the fundamentals will improve each customer's banking experience. This presents the opportunity more so than ever for banks and fintechs to work together to accelerate technological change in the UK retail banking sector.
Theo Gough, Principal Architect - FINkit, Monitise
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