Driven by consumer desire for more value, the Revised Payment Service Directive (PSD2) forces banks to share their data with third parties. Innovative developers have new opportunity to disrupt retail banking. But banks have other plans.
By Kelly Shermach
"Banks are moving beyond merely providing a place to store money and borrow money," says Nicole Sturgill, executive advisor at Gartner. "They’re offering new products and services that help consumers better manage their finances in a way that helps those consumers meet their short- and long-term goals."
Some banks have API-creating partners in their data-driven pursuits of loyalty, greater share of wallet and new revenue. But PSD2 "gives banks the flexibility to come up with their own solutions," Sturgill says.
Third-party poaching or partnering?
"Payment is one place where fintech disrupts the financial services space," says Jerry Silva, global banking research director for IDC Financial Insights. The largest fintech poacher is PayPal. It completely upset the traditional payment environment. Now it threatens small business lending.
As a result, more banks partner with third parties on P2P payments and loan origination. But one-to-one partnerships in which banks demand exclusive rights to an API constrain fintechs, Silva says. So while big banks create in-house innovation labs, fintechs are building payments as a service, loan origination as a service. And they'll invite all comers.
Banks will save money contracting these functions from the cloud, Silva says; their internal, proprietary processes often rely on clunky legacy technology.
Sturgill agrees. "Banking in 10 years may look very different than it does today," she says. "Right now, banks are focusing inward to create a structure that allows them to adapt quickly and be flexible."
"When banks start creating an ecosystem of partners, they open up the walls of the bank to more than just deposit accounts and loans," she continues. "They can provide financial management tools to help people save more, offer home buying services outside of the traditional mortgage, and help people understand how to balance their day-to-day spending with long-term goals."
What worries bank CIOs?
CIOs don't worry about data security in public clouds, the cost of potential breaches (they have money set aside), nor reputational risk, says Silva. Consumers are getting used to database hacks. However, CIOs fear regulatory requirements of PSD2 and copycat regulation anticipated in the U.S. If the government requires another 5% of the IT budget, banks may need to take innovation and digital transformation slower.
If the government requires another 5% of the IT budget, banks may need to take innovation and digital transformation slower.
Are banks ready to listen, learn and respond?
Consumers expect greater transparency, personalized communication and offers, data-driven service and advice. And banks want to deliver, says Sturgill.
"Moving from goal to execution is the hard part," she says. Culture, workforce skill set and technology changes are a must as are new partners, products and services. "That’s just the top-level change," she says.
"They’re hiring people with new skills and working on transitioning their culture from one that is hierarchical and long-term project-oriented to one that provides autonomy to employees at all levels to take care of customers and rewards creativity and agility," she says. "The road is long. Persistence is going to be necessary to make it happen long term."
"The loyalty question remains within banks themselves," Silva says. "Competition is going to be between the banks."
Kelly Shermach is a reporter for The Wise Marketer.