Continuing my musings on Open Banking disruption, I feel that those banks who are ready to make the technological and strategic commitment early enough will reap benefits of PSD2. The follower banks will make the same investments later in the cycle just to be in the race.
PSD2 and Open Bank APIs will be implemented from January 2018 across UK. It will come in to force across EU countries and Open Banking guidelines are issued by Competition and Markets Authority. Banks (in their capacity as Accounting Service PSPs) are mandated to serve other PSPs who perform Account Information service or Payment Initiation Service.
CMA has mandated top banks to publish common APIs which will service both Account Information request and payment initiation service for the requesting PSPs. CMA also targets to make relationship switching (customers switching their entire relationship from their current bank to another) easy and instant.
The above two initiatives of the EU are, in my view, the most powerful of the decade which will deliver far reaching benefits for the economy. Consumers, both corporate and retail, will be firmly in control of their banking portfolio when open banking becomes a reality. When consumers can have data insights and flexibility to operate their portfolio, they are able to make and implement quick and well researched decisions rapidly and effortlessly. This means robust transaction growth culminating in a money multiplier effect positively influencing economic growth cycle. When this comes true for all the EU countries transacting in Euro, the growth multiplier could be exponential.
Good thus far, but the moot points are….
- Where does this leave the banks?
- Are banks made weaker by all these developments?
- Will Fintech take over the market from banks?
Well, I believe, with open banking, Europe will see a strategic transformation. The good news is that banks will still hold the key when it comes to core banking service. The great news is that they will deliver specialized strategic services rather than mundane deliveries.
Change and partner for customer centricity
Let me explain. In the near term, banks will continue to serve customers who will transact directly, such as walk in customers, internet banking, corporate banking so on and so forth. However, these service channels will dwindle rapidly over the next year or so. The banking services through 3rd party service provider requests will grow rapidly during the same period powered by the competitive Fintech industry. As the Fintech providers explore and understand the new landscape better, the transactions through these 3rd party channels will grow both in volume and in innovative product and service requests.
Open banking will change banks for the better
Banks will deliver the same banking services through 3rd party service providers using their technology platform. However specialized services such as syndicated loans, corporate wealth management and many others will continue to be within the purview of direct banking.
In the PSD2 enabled future, a new layer of market participants will now operate between banks and end customer, driving innovation and empowering customers. But banks that will read the market movements, address the rapid changes strategically and offer innovative solutions on top of a stable and scalable technology platform will gain leadership position.