As a recent article published here on PaymentEye revealed, opinions on what will happen in the payments space in 2018 are fairly varied. In particular, the effects of Open Banking and PSD2 are far from unanimously agreed upon. Depending on your standpoint, it’s either the beginning of the end for the banks, or simply the start of a new chapter.
If the banks are to weather the storm, their APIs will need to improve at the rapid rate set by their opposite numbers in the Fintech camp. Conversely, Fintechs might have technological innovation on their side, but lack the established trust and enormous customer bases that the banks have comfortably sewn up.
Which leads one to think – if you can’t beat ’em, ‘join em.
I spoke to Olly Betts, CEO of Open Banking platform OpenWrks, and Richard Davies, Commercial Banking Director, TSB, to find out why collaboration post-PSD2 and Open Banking is so essential, and how the two sides can come out stronger.
Why is collaboration so important in the Open Banking/PSD2 landscape?
Olly Betts: Collaboration is so important because Open Banking and PSD2 is breaking new ground.
Everyone in the Open Banking ecosystem, the banks and FinTech innovators like ourselves, all need to be moving at the same pace. Which doesn’t always work, as typically the innovators will be setting the pace, driving forward faster than the regulators can keep up with, whilst demanding more from the banks than they’re legally obligated to provide.
A good example of why collaboration is important, or evidence that it’s working, is the managed roll out approach that the Open Banking Implementation Entity (OBIE) have taken. Bringing the Banks and the FinTechs that were first out the blocks together, to consume the Open Banking APIs and make sure they are secure and will work in the real world.
All parties are collaborating on how the APIs are working. This includes stability, performance and whether the data they make available for customers will actually enable the innovation that everyone is hoping for. Plus, it ensures the regulator is comfortable that customers are being protected while that innovation is happening.
Richard Davies: Open Banking provides a further catalyst for collaboration and partnerships – though it shouldn’t require regulation for banks to want to partner with fintechs to deliver great customer experiences! Open Banking has the potential to bring consumers the benefits of real competition not just through collaboration between banks, but between banks and non-banks for the first time could mean that once and for all consumer needs are put at the center of banking.
For example, we are likely to see more collaboration between banks and third party providers that have a specific product to meet a customer need. At TSB, we’re experimenting with Bud – a UK FinTech that our parent company, Sabadell, has invested in. Bud aggregates all of a customer’s financial services in one place, and uses this transaction data to provide personalised offers for other services, such as utilities.
And we could also see more collaboration bank to bank. The sharing of credit data through a secure API for example benefits all consumers and all banks. But what is more this is the kind of collaboration that could increase competition and switching. We know that many overdraft customers don’t switch at the moment as they have no guarantee they can take their overdraft with them when they switch accounts. Instant credit decisioning will free these customers for the very first time.
What advantages does Open Banking present for consumers, and for businesses?
Olly Betts: Open Banking in itself, doesn’t mean a lot for consumers and businesses. It’s what it enables third parties to create for both consumers and small businesses that delivers the ultimate end benefit.
Open Banking as a mechanism will allow providers to get a better understanding of people’s relationship with money, resulting in much more personalised and easier to access services for all of us.
For example, replacing the arduous, painful income and expenditure evidencing process to get a mortgage with an automated process. Meaning you can understand what type of mortgage you might be able to get in a matter of minutes. Or easing some of the stress from a debt management situation by replacing what sometimes feels like an interrogation of someone’s finances, with an automated process to establish affordability of repayment. And in the small business market, increasing access to finance for small businesses by understanding more about businesses that may not be mature enough or have a long history of management accounts, but are growing fast and could benefit from finance to help them get to that next level.
Richard Davies: We’re supportive of Open Banking or any initiative which empowers consumers to think about whether they’ve the best products for their individual needs and helps them to take action.
We believe Open Banking has the potential to deliver greater levels of competition to the UK banking market if it’s implemented well. Open Banking will be a success if it leads to lasting positive change for the industry breaking down the barriers which have made it too easy for big banks to hold on to their customers and maintain a stranglehold on the market controlling over 90% of all UK business bank accounts.
With greater competition, banks and FinTechs will need to fight for customers and if they don’t evolve the way they operate, innovate, or build products to meet customer needs they will be left behind as customers vote with the feet.
How do you predict the public will respond to the wave of new third party offerings? Will it take time for consumer trust to be established enough for customers to use them?
Olly Betts: For any new services created using Open Banking, trust will be essential.
But trust goes beyond just security, trust is everything. Whether people will give up their precious time to use a product, before they even consider sharing their information and their personal data to get the benefit or indeed pay for services?
The importance of trust in a brand, especially in financial services, hasn’t changed just because of Open Banking, but I do believe it will take some time for any completely new products and services to emerge and be widely adopted.
In the shorter term, rather than waiting for that to happen, we’re focussing on the fact that there are lots of existing financial processes that can be significantly improved by allowing people to provide a more up to date view of their financial situation and circumstances through Open Banking.
This is how people will use Open Banking in the immediate future. But they won’t call it open banking, they’ll just call it a great experience, whether that’s applying for a mortgage, loan or getting back on their feet and clearing debt.
Richard Davies: Banks exist to provide a safe place for people to keep their money. In the Open Banking era, it is more important than ever that banks and financial services providers not only deliver on this mandate from a tech perspective, but also explain to customers how they are delivering a safe and secure service.
At TSB we have invested in a new banking platform and we have the technology to guarantee privacy to our customers, but it is necessary to develop common standards so that none of the participants in the ecosystem pose a risk to the rest. The chain is as safe as the weakest of its links.
We know that customers are uncomfortable about their data being shared with third parties. It is therefore essential that the industry builds a secure Open Banking ecosystem to reassure customers that their money is safe. New technologies such as biometrics will go some way to putting customers at ease. But it’s important to remember that it will take time for customers to build this trust.
Customers need to clearly understand what the benefits are for them in using Open Banking. The underlying aim is to improve competition and encourage product and service innovation, by making it easier for customers to have a single view of their finances and compare or switch financial products by viewing information that is like-for-like and easy to compare.
Predictably, a great deal of the interviews and thought pieces published on PaymentEye of late have come around to Open Banking and PSD2 at some point. I presented Olly and Richard with two opposing quotes from recent PaymentEye articles on the effects of the legislation, to get their take.
1. Victor Trokoudes, CEO, Plum: “Open Banking will bring added value to two distinct areas: enabling people to make the most of their money and empowering people to grow their money over time.” (Read the original article here).
Olly Betts: I agree with the two areas Victor highlights where Open Banking can provide added value. However, both assume the user has some disposable income in the first place, which excludes a large element of the population who do not.
Open Banking can add value to everyone including those who do not have high disposable incomes, for example, by increasing access to credit where they might not have got it before, or by helping people who are struggling to actually make ends meet when they’re in a difficult situation. Through Open Banking they can better illustrate their financial situation and hopefully more easily find an affordable and sustainable way to get back on their feet.
2. John Chaplin, EPA: “I think that the impact of PSD2, in the short term, will be muted. I don’t think it’s going to be what the European commission think it will be, and I think that the eventual beneficiaries of PSD2 probably won’t be who we thought it would be, either.
[…] I think the idea that new companies will come in and take business from the banks isn’t accurate. The reason being that I don’t think that consumer payments is profitable enough in Europe, and new entrants who don’t make money won’t survive. Consumers tend to want things for free in Europe.” (Read the original article here).
Olly Betts: Personally, I think the market needs to be more ambitious. Returning to collaboration within the ecosystem, our collective objective has to be to create better products and services for customers, so there should be new companies and new business models emerging.
It’s not just about new companies coming to take business from the banks, it’s about making banking services provided by the banks better as well, because of how people can use information to deliver more personalised services.
Yes, the commercial consideration of whether those business models are profitable absolutely has to come into play. Where partnerships between the incumbent banks with big customer bases and FinTechs with technologies and solutions that can serve those customers better will win and be positively disruptive.
I agree with John’s points in the context of changes to the payments ecosystem, , more time is needed for PSD2 to drive positive disruption in payments , primarily because the payments market has been innovating so much and so fast recently. If you look at someone like Modulr and their payments API, they’re enabling people to get access to faster payments networks much more easily and manage payments more cost effectively, in real time.
I’m a big believer that Open Banking really will shake up the market and new business models will win.
Richard Davies: I would disagree, in that I believe that Open Banking will have a substantial impact on financial services and deliver good customer benefits, which is why I advocated it to the CMA back in 2015. However I do think it will take time to see customer adoption grow, as with any new technology, and its critical to show customers how they can benefit to help adoption.
2018 is well underway – what have the payments thought-leaders predicted so far? Who do you think is on the money?
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