Massive changes are about to happen in the financial landscape in the near future. Payments are being powered by the potential of Big Data and enabled by the introduction of the European Payment Services Directive (PSD 2).
What if we had online auctions where consumers and companies could demand a quote for a loan? And what if banks could place automated real time bids on this auction, based on algorithms that plough through data from different sources? This is just one example of the massive changes that are about to happen in the financial landscape in the near future, powered by the potential of Big Data and enabled by the introduction of the European Payment Services Directive (PSD 2). This directive will inevitably shake up the financial landscape and pave the way for newcomers in the market. It's time to assess the threats and opportunities in order to gain new competitive advantages.
If you're a professional in the European financial services sector, you can hardly have missed the news of the introduction of PSD 2 in the European market. European lawmakers recently reached an agreement on this Directive, paving the way for third party direct access to bank accounts (XS2A). The quintessential element of this provision is that banks will have the obligation to grant access to payment data to other parties (non-banks) which enables new products and services and which may marginalize traditional banking business models. By the use of APIs (Application Programming Interfaces), third parties can open up banks' Pandora's box and offer customers a range of options to interact with their bank, provided that their customers explicitly agree to this. They can also initiate transactions on behalf of a customer which means that third parties are in the position to completely take over the banking interface. In this light, it may not be surprising that banks have lobbied fiercely to amend the PSD 2 concepts and that numerous companies (ranging from startups to big internet companies) are eager to jump on the bandwagon.
PSD 2 is one of the many new developments in laws and regulations reshaping the financial services sector. However, we should not look at PSD 2 as just another regulation that needs to be implemented. There's little doubt: by 2018 – the expected implementation of PSD 2 – the complete banking sector as we know it will see drastic changes that will require incumbents to adapt their business and operating models. It will force banks to strategically rethink how they deliver value to their customer.
The good news is that opportunities for new sources of value are plentiful. The bad news is that incumbents will be challenged heavily by tech savvy newcomers in the market who move at an unprecedented pace. One could make the comparison with the early days of the internet: in the early nineties we all knew that the internet would change the way we did business. In the following ten to twenty years, the business landscape transformed. The same will be the case for the financial landscape over the next ten years.
With a bit of imagination, numerous possibilities pop up. Real time lending could be integrated into commerce transactions, based on automated data analysis. Software companies can integrate payment platforms into their software suites. Risk models can be improved tremendously, not only because the data analysis enables tailor-made individual assessments but also because it is based on real-time data instead of last year's accounts. A key question is: what is the value for the customer? Combining and analyzing data from different sources may offer improved customer experience, comparison with peers, valuable suggestions for financial gains and early warnings of future financial problems. And the option to have one financial dashboard offering customers real time insight in all their financial products will no longer be utopian.
There's no doubt that both incumbents and newcomers (greenfields, big internet companies, software vendors or other parties) have a unique opportunity to conquer (new) market shares with useful innovations. These times of change offer a momentum to gain competitive advantage, which can potentially be found in a number of domains:
Of course, there is no such thing as a recipe for success in dealing with this challenge. It demands a tailor-made strategic rethink and top management should prepare for this new strategic battle now. PSD 2 will prove to be an accelerator for innovation and transformation and will force financial services to improve their customer service. Not only in the payments chain, but in nearly all products and services of banks.
Max Baak, Senior Data Scientist, KPMG in the Netherlands
Sam van Hensbergen, Manager Big Data Financial Sector, KPMG in the Netherlands