EU open banking standards could enable banks to launch innovative global payment methods
New open payments regulation in Europe and the UK is creating a massive opportunity for banks around the world to improve their relevance, their business models and their revenues. Yet few traditional banks have recognized how open payments standards may create a significant competitive market advantage and re-establish relevance with their customers by prompting payments innovation.
For European banks, the rules come as a follow-up to the existing EU Directive on Payments Services (PSD) that helped create a single payments market across Europe in 2007.
The Directive calls for banks to open up access to their accounts to third parties for the purpose of consolidating account information and making payments. This will encourage emerging payment methods and so-called Account Information Service Providers (or AISPs), forcing the banks to allow retailers, other banks and even fintech startups access to their customer data.
In the UK, the government also requires some banks to share data about products, services and customer transactions. UK banks must also set up open APIs (Application Programming Interfaces) by the start of 2017, whereas EU banks have until January 1st 2018 to comply.
The changes will usher in a new era of customer control. With the appropriate permissions, customers will be able to centralize their account information and payment options into one unified mobile application, enabling them to conduct day-to-day banking on the platform of their choice, provided by their bank or an innovative fintech.
The obvious threat for banks is one of disintermediation, and eventually fintechs could hold the customer relationship, while traditional banks simply maintain the infrastructure system ‘plumbing.’
Banks can approach the changing regulation in one of two ways:
Taking a compliance-led approach will likely tick all of the risk and IT boxes, but it won’t mitigate the risk of market disruption. And it certainly won’t open up new business models, improve customer loyalty and enhance relevance.
We see a massive opportunity here for banks to turn the regulation – and the broader shift towards open banking – into a competitive advantage. For example, banks could create their own AISPs to provide their customers access to their other banks and payment methods, all within one (branded) mobile app. They could partner with fintechs to use that data to identify trends and create new targeted customer propositions. Or they could explore ways to sell the information to retailers and other third parties.
Those that take a more strategic view may also find that the shift towards an open banking environment acts as a catalyst to rethink how the organization uses data and how that influences the digitization agenda.
Three things are required for banks to make the most of the open banking regulation:
While the regulations are focused on UK and EU-based banks for now, this is clearly a global issue. Ultimately, we believe that the shift towards PSD2 in the EU and Open Banking Standards in the UK will spark a competitive race across global banking markets centered around owning the customer. Our analysis suggests that early movers who more broadly innovate their payments practice will gain competitive advantage in both innovation and customer centricity.