In 2018, the financial services industry will undergo a transformation that will fundamentally change the relationship between consumers and retail banks. By giving consumers the choice of new direct-to-account payment methods and the ability to share their transaction data more freely with third parties, the EU’s Second Payment Services Directive (PSD2) and its UK implementation, ‘open banking’, will alter the structure of retail banking for good.
Although the received wisdom is that open banking will lead to a loss of market share for established players as they are forced to make data available to other companies – in particular fintech startups and digital specialists – forward-looking banks are thinking much more positively.
In fact, they see open banking as an opportunity to create new business models and revenue streams based on a real competitive advantage, built on long established trust and a large-scale customer base.
Open banking will certainly see the acceleration of digital innovation. Banks are rethinking their business models to go beyond just compliance with the new laws by expanding their digital offerings and creating a seamless customer experience in mobile and web.
Smarter digital identity systems will be essential to making digital banking part of a positive customer experience. Intelligent and contextual authentication processes – from the use of one-time passcodes to biometric identification – can be the key to creating the genuinely seamless and secure customer journeys that users expect.
A new payments business model will become available to banks once open banking takes effect. By opening up the traditional structures that have dominated financial services, open banking and PSD2 create opportunities to condense the payments value chain. This enables the in-app, one-click purchasing options that are threatening the dominance of card payments.
New payments initiation service providers will prompt innovation in the retail environment, enabling apps to connect directly with their customers’ bank accounts. This allows the customer to seamlessly make payments, with authentication options such as facial recognition and fingerprint sensors ensuring payments remain secure.
By opening up the traditional structures that have dominated financial services, open banking and PSD2 create opportunities to condense the payments value chain
This kind of low-friction, high-assurance experience will disrupt more traditional payment methods, especially as retailers keep an eye on in-store innovation from the likes of Amazon.
With the need for explicit consent from the consumer for such payments, there come opportunities to personalise the shopping experience with real-time contextual services and offers.
Providing consumers with dashboard options for managing their consent will be an early differentiator, showing respect for privacy whilst enabling access to a wider ecosystem of partners for loyalty, rewards and extended services.
Turning data into insight
Another new entity enabled by PSD2 and open banking is the account information service provider, which is focused on the vast potential of transaction data to provide real insights about customers. This offers an opportunity for a deeper level of customer engagement, delivering a different experience from the online bank statement and inviting customers to engage with their own financial wellbeing.
Among challenger banks there are already examples where real-time spending insights, saving goals and relevant offers are being presented to customers through a modern interface.
With such vast amounts of customer data in their possession, banks will not pass up on a new way to offer value, especially as this will increasingly be the focus of competition and differentiation.
The potential to collect data from accounts the customer holds at other banks and then provide the customer with a data dashboard for a 360-degree view of their financial status is a tremendous development.
Businesses have invested heavily into analytics capabilities to gain a better understanding of their customers’ needs and preferences. Technology platforms such as Facebook and Google are certainly dominating this market, but banks have a major advantage in that the data they hold concerns real-world purchasing behaviours.
As such, insights gleaned from this information can be acted upon more successfully than those gained from the non-specific data provided by likes and clicks. Of course, this raises very important issues concerning the acquisition and management of consent.
In 2018, two further laws will come into force: the Guide to the General Data Protection Regulation and ePrivacy Regulation – both designed to make digital life more human-centric through further use of consent.
In order to lay the groundwork for stronger, more trust-based customer relationships, banks should focus on convenience, choice and control.
Time wasting and duplication of effort need to be swapped out for convenience if organisations are to take advantage of open banking. It’s all about redesigning the customer journey and delivering a seamless, context-aware customer experience, enabled by secure methods of authentication, biometrics and authorisation. At every point, teams need to be asking how easy and secure the service is for the customer.
Choice is also vital. Open banking is designed to give customers greater flexibility. Banks should embrace this and use it to gain an edge over their competitors. This means not just complying with regulations at a surface level, but going beyond that and offering real value and choice to the consumer.
The development of new propositions and the positioning of new partnerships is well served by secure access to application programming interfaces, and banks have a distinct opportunity to extend identity assurance to a wider system that covers customers’ different life stages and needs.
Lastly, putting customers in control of their own finances is essential. Banks should establish a system and culture that treats customer data as a shared asset, giving users transparency and control over how and under what circumstances their information can be used.
Customers knowing they can turn their consent on and off at their convenience will build trust and result in more data being shared. It opens the door to new journeys that are contextually rich, based on location, activity and intention – all fundamental to personalisation.
Open banking and PSD2 will undoubtedly bring huge changes to the financial sector. However, these changes should not be viewed as a threat to banks and financial service providers.
Established players should face new compliance demands with agility, greater collaboration with partners and a firm focus on delivering a first-class digital experience.
The ambition of legislators is to put citizens firmly in control of their digital lives. In 2018, there is first-mover advantage to be gained by institutions that can securely leverage the decades of knowledge and trust they have built up and deliver greater value to customers.