21st century banking
FinTech is in the spotlight, Silicon Valley is now turning its attention to the lucrative banking sector. Challenger banks, such as Monzo and Atom, are aiming to make banking transparent and simple. The emergence of FinTech start-ups has drastically increased competition in the Financial Services (FS) space.
Challenger banks are gaining ground in the marketplace because of their agility. This agility allows their customers to access all the new services they have become accustomed to from the likes of mobile payment platforms such as Apple Money, which enable access to digitally advanced companies, like Uber and Zillow.
Challenger banks supply their users with customer focused services and offerings. An added layer of competition comes from other non traditional FS sectors such as retail and travel, with the likes of Virgin Money and the Co-Op Bank.
This influx is bringing increasing regulation. The regulation entering the industry is forcing banks to open up their systems, so customers can start to move their finances around third parties with ease.
With these regulations new digitalisation is required, so banks are not only compliant but are able to keep up with the increasing demand placed on them by their modern customers. Many traditional banks are having to overhaul their incumbent systems and processes. If they don’t they will cease to be competitive.
Open banking and PSD2
Open Banking will force high street banks to open up their data to third parties, creating new partnerships and collaborations, not only will this be beneficial for the customer but will allow banks and businesses to exchange large amounts of data which will help them become more intelligent about the services they build and sell. This exchange of intelligence will increase innovation and developments in other areas of banking technology.
To cope, banks will need a middle office system of engagement which will help with data abstraction from multiple siloed systems. Turning data into insights allows banks to provide more precise offers to their customers.
Most of the larger banks are integrating or embedding Open Banking frameworks into their customer offers. Smaller banks are simply monetising the access for certain APIs which they are now bound by regulation to provide to other players.
With Open Banking comes need for increased security and structure surrounding the transfer of data between partners, this is where new regulation comes in, the most pressing being PSD2.
>See also: Is FinTech really a game changer?
The new EU directive, PSD2 (Payment Service Directive 2), will be come into play in January 2018, demanding banks into open up their vast databases of customer information.
For banks to comply third parties will be allowed safe and secure access to their highly sensitive data. This directive will increase innovation, reinforce consumer protection and improve the security of online payments and account access within the EU.
With the Brexit coming into fruition in 2019, this regulation could have serious implications as the whole regulation centres around opening up banking systems in and across Europe. Severing ties with the largest financial capital in the world, London, in just 12 months from implementation will put a real spanner in the works.
Impact of PSD2 and open APIs
The implementation of PSD2 will have a major impact on banking operations, IT costs will increase as banks speed up their journey to compliance. Banks such as HSBC and RBS have allotted billions of pounds to undertake digitalisation.
But the countdown to implementation day has started; with less than a year to go all European banks need to have a compliance plan and allocate budget towards getting overhauling legacy systems, to make them regulation ready.
To comply effectively and efficiently, banks will have to innovate, creating safe and secure systems using new technology, such as Modularised Systems. These systems act in a similar way to a honeycomb, each transaction and API is syphoned off into its own chamber, thus preventing third parties access to the bank’s entire data set.
Additionally, once in force, the need for PISP (Payment Initiation Service Provider) will be lost. PISPs are the service providers initiating a payment on behalf of the user, of which banks are one, meaning banks will no longer be able to gain revenue from this, costing them 9% of retail payments revenues by 2020. Banks will now need to find a way to diversify, a possible solution is the monetisation of the data in their systems.
Subsequently, non-traditional FS companies can now enter the marketplace without being held back by heavy regulatory compliance which has burdened the high street for decades. There is growing trust in non-traditional banks, due to past history with traditional banks, as well as customers receiving personalised deals and offers.
The greatest impact of PSD2 will be the opening of the entire financial services industry, which means many traditional banks and FS companies will see irreversible changes to their revenue, customer base, partnerships and even their culture.
To PSD2 and beyond
The future of Europe and the UK is uncertain but this regulation will enable billions of new transactions to occur in an open financial marketplace.
Even with the threat of Brexit looming, this regulation could impact the way the UK works with Europe after 2019. Either producing strong commercial relationships between European countries and the UK or elevating technology above borders.
Increased competition in the financial market will enable greater innovation as banks fight for their customers, against each other and the FinTechs, all striving to be customer centric.
In turn customers will see improved services, as these companies upgrade their technology and overhaul their product focused mentality. There is going to be a battle, but who will come out on top?
Sourced from Nanda Kumar, CEO of SunTec