Let’s be completely open: Europe’s new Payment Services Directive (PSD2) will fundamentally change banking as we know it. Forever. It is not a fad. Life will be different in 2018 when banks are to allow approved third parties to offer services to their account holders. Perhaps too few banks have understood the scope of the changes they will face – and the consequences are obvious: not all banks will survive.
This is due to a need for scale, but even more to a need for change. Banks that lack an understanding of the need for change, or that are not sufficiently strong financially to undergo this transformation, are at risk. Banks as such will not disappear and will not lose their entire business to fintechs. Some may succumb, but the industry will not vanish.
Changing game, changing players
As for other types of players, the solutions that are used in the future will be influenced by how they benefit society, customer demand and preferences, and the constellations of players that team up and rally behind strong common solutions. It could have a profound effect if one or more of the world’s IT giants decides to fully enter the payments arena, utilising their access to the customer interface and customer data.
Players like Google, Facebook, Apple and Alipay all have access to vast data on customer behaviour, needs, interests and movements, which could help them become very relevant in any customer payments offering. Banks also have plenty of customer data but have not, until now, had systems allowing them to make valuable use of it. Among fintechs, you may find brilliant ideas or concepts. But without the interface or data from a significant customer base, it is hard to get anywhere fast.
Opening up to new experiences
In the past year or two, we have seen the typical fintech rhetoric towards banks changing from “we will eat your lunch” to “let us form a partnership”. Banks are sitting on valuable assets, including the trust element. To whom do you want to entrust your pension savings? Through whom do you want to make your big international payment to your relative in Australia? This trust combined with the large customer base really matters.
Ultimately, banks can approach PSD2 in two ways. The first is to simply comply with the regulations, which I’d argue would make a bank a sitting duck. It means opening yourself up to both new players and to competing banks, without being able to return fire. The second way is to see PSD2 as an opportunity. We see potential possibilities to offer our customers new services together with partners, and we could offer our customers services in geographies beyond the bank’s home region.
Scandinavian banks are serving corporate customers who have been expanding their business globally for quite some time. If you, as a Scandinavian bank, can’t think globally then you are irrelevant. This is also true for the approach to PSD2 – expect Scandinavian banks to be forward- leaning in this new exciting and competitive environment.
Banking will survive, some banks will not
There is little doubt that the banking industry will survive. Some banks will adapt and thrive, emerging strengthened. Others will die. The pressure for change could drive partnerships and mergers – perhaps less so between banks, and more likely between banks and technology companies. Technology players can bring new solutions, services and interfaces, and banks can bring customers bases and banking licences.
The licence is an asset, but carries a cost in the form of the compliance apparatus that needs to go with it. There are tech companies that claim to be able to build a bank platform – hearsay has it one of the giants claims that it could complete the task in six months. This writer recently met another tech group that said it has a technical banking platform ready, from which it can deliver accounts, payments and know-your-customer (KYC) modules to anyone that want to build a bank capability. Building a banking system platform is not that hard today, but having to add the necessary compliance resources for actually operating as a bank seems to be a quite powerful barrier to entry into the banking industry.
Change a certainty in an unpredictable future
There is a great deal of chatter and speculation around what banking will look like in 10 years’ time. Frankly, it is exceptionally difficult to know how the landscape will be in five years or even in 2020. The only thing we can be certain about is that we will not look like we do today. Expect our business to be organised in a way that makes us quicker and more agile. It’s also easy to imagine that we would be organised more along customer interfaces and “360-needs” rather than along specific product lines.
Another certainty in the years ahead is that banks need to change. The industry will need to have simplified, adaptable and up-to-date technology to work with new entrants; and secondly, banks need to ensure that their culture – attitude, values, and skills – is ready for the path ahead. The financial clout of many banks means investment in technology and the upgrading of systems should not be a hurdle, as long as the willingness is there and the correct investment decisions are made in time. Regulation, such as PSD2, and the requirement for open application programming interface (API) banking, should also ensure banks are ready from the technology side.
For many banks, culture is the biggest challenge – what good is investing in a Tesla if habit dictates that you drive it like an old car from the 1980s? It is an easy trap to fall into and to avoid it banks must adopt the culture (values and mindset) of digitally native companies, develop internal skillsets and pursue agile development methods, such as start-up accelerators, hackathons, and innovation labs. Traditionally banks have developed their products themselves, in-house. Opening up and co-creating solutions with third parties and directly with customers is a big cultural change in and of itself.
Customers hold the key
Ironically, in a future-focussed world, banks need to get back to their roots of enablement and opportunity creation for their customers through deeper contextual services. To dilute this to purely “service design” or “service provision” is an understatement. The future of financial services is to not only develop banking services, but develop services that handle, or seamlessly integrate to, the end-to-end customer need. Understanding the full customer need – and in fact, taking that journey together with the customer – and grasping the context within which banking services are consumed, is a paramount first step towards building contextually relevant services.
It is essential that banks enter into a close, ongoing dialogue with customers around digitalisation to ensure that they are in tune with their needs, and to allow the customer to actively shape the future landscape of payments and financial services: the fanciest digital solution is worthless if it fails to meet the needs of the customer and its core business. This method of collaborative development is a definite trend we believe in and a sure-fire way for banks to deliver attractive and relevant digital solutions to customers.
Banks must be open to open banking’s opportunities
This desire to co-create the best solutions for our customers directly influences our strategy around open banking. We did not want to enter the APIs space just because we had to, but rather because we saw an opportunity to serve customers across segments in an even better manner by co-creating services to meet their needs.
This is why the group was first in the Nordics to build and launch our developer portal – it sees huge opportunity in making the collaboration between external partners and a bank’s internal departments easier. Our mission in open banking is to make it simpler, both for our external partners, but also for internal departments that want to collaborate internally and externally. It will produce exciting results.
Instead of gazing into the crystal ball and trying to envisage what our market will look like past 2020, banks need to be open to change, build capabilities, be able to track developments and be ready to act quickly and decisively when we see what emerges. While the future may be difficult to predict for banks, what does seem certain is that customers will see real benefits. They will see new value propositions and solutions that result from partnerships or due to heightened competition in the market. Finally – if we’re open about it – who would bet against forward-thinking banks being at the centre of it all?
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