Norway


is a hot subject today, including the question of whether it will take a big bite out of the traditional business. In a move that will give companies more market access, two ground-breaking regulations in Europe will force banks to share customer information with third parties when request it. This may well revolutionize consumer finance in Europe and will be closely watched in the U.S. and around the world.

Knowledge@Wharton: Let’s start with what exactly is happening. The formal titles are the Open Banking Initiative in the U.K., and the Payment Systems Directive, which will affect all of Europe. It’s sometimes called PSD2 or the Payments Directive.

Pinar Ozcan: These are regulations that actually force banks to open up their customer data, of course upon customer’s consent, to third parties in order for those third parties to provide better services and better data analytics to the customers. If, as a customer, I decide that I want to go with a website or some apps that I’ve found that promise to help me to find a better mortgage, then upon my consent, that app is going to be able to connect to my bank and get my data and analyze it in a meaningful way, to see if they can give me a better deal than what my bank has been giving me.

This is obviously quite revolutionary, if it works. But it depends on whether the customers are going to adopt this new way of behaving and if they are going to these third parties with their data.

Knowledge@Wharton: Banks obviously don’t want new competition. But this rule is saying, “Sorry, you have no choice. You have to do it if the consumer wants it.” Are banks the losers?

Companies that have the largest customer base — and in this particular setting, these will be the incumbent banks — are in the best position to turn their business around and make it a platform.–Pinar Ozcan

Ozcan: No, in fact one of the things that we know already from research is that those companies that have the largest customer base — and in this particular setting, these will be the incumbent banks — are in the best position to turn their business around and make it a platform. So if banks were able to act fast and get these third parties, these fintechs, on board to provide a platform where maybe in the spirit of, let’s say, the application store that we see on different mobiles, like Android versus IOS, for example … and act quickly to build a platform in order to offer better services to the customers, the customers wouldn’t even have a need to go anywhere else.

Everything would already happen on the bank’s platform, anyway. So in a sense, the banks have the greatest leverage to change and to act quickly, to turn their business around, to make it rather than being in between their four walls and kind of concentrating on securing the data — which of course is quite important in this particular setting. If they are able to collaborate, they have a lot to gain from this — much more than a small bank that’s coming into the business or a fintech that’s going to, as you say, struggle to get the customers to themselves.

Knowledge@Wharton: A natural collaboration seems to exist. On the one hand, the banks are established. They have the big customer base. They have the trust of the customers. The fintech companies, on the other hand, have the ground-breaking ideas. And so the banks could collaborate with them, or I imagine in some cases they would be investing in the fintech companies or even buying them out.

Markos Zachariadis: What’s really interesting here is that there is the possibility for entire shifts in the architecture of the industry as a whole. Pinar nicely gave the example before that upon the customer’s consent, you will see customers would like to share data with others. What that does, essentially, is create an opportunity for the sector to move towards a more modular architecture, as we say — or towards its own architecture.

We’re used to banks as being vertically integrated, in a way, like manufacturing firms are now or used to be a couple of decades ago. And that meant that a bank basically does everything itself. It provides the infrastructure. It provides all the kinds of communications. It provides all the payments and processing. It provides pretty much most of the things we know, as customers and hiring the supply chain at the bank.

But opening up with certain customer data in a standardized way, that leads to collaboration. By itself, collaboration is useful, but it means that we’re moving to a new kind of format in the industry which is more modular. It’s kind of like a shift in mentality, of how business is being done in the banking sector.

Knowledge@Wharton: Europe is leading the way on this. And typically, you might expect that to happen in the U.S., just because it is so strong on high tech and the huge international banking system here. And yet, everyone will be watching what happens in Europe.

Zachariadis: I think that’s fair to say. I think that you take specifically London, being one of the financial centers, but also at the same time, a very important tech hub — so it’s one of the rare places in the world which is also a center of significance and a tech hub at the same time. And the two worlds kind of meet together.

It came naturally when, after the fiscal crisis, a lot of tech entrepreneurs saw this opportunity to move into the financial service sector because of the huge inefficiency. So the financial crisis was a wake up call. But these were more effective in the U.K. and London because of the reason I explained. It was where the two worlds meet of tech and finance. In the U.S., you have Silicon Valley, obviously, but then Wall Street is quite far apart. I’m not sure how much these two worlds are communicating. Well, at the moment a lot more than they used to, but I think there was a boundary between them.



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