Ignorance is bliss, the saying goes, in which case the British public is more than happy about changes to banking regulation that were introduced on January 13.
The new EU legislation on payment services – PSD2 – and the introduction of Open Banking in the UK seem to have passed the vast majority of people in the country by, according to an AltFi News article last month.
This referred to a report by Which saying that 92 per cent of consumers hadn’t even heard of Open Banking.
Perhaps this is hardly surprising, as it appears that the high street banks haven’t yet really come to terms with the implications of these changes themselves, even though they represent an existential threat to the sector as it currently exists.
The role of PSD2
PSD2 is being introduced in the UK in the form of the Payment Services Regulations, which govern the provision of payment services and are designed to increase competition.
Banks and building societies will have to make certain information accessible in a standardised, straightforward and secure way to other approved companies, who wish to create new products and services offering customers faster payment methods and innovative new banking products.
A clear implication of this is that, unless banks up their game and start to offer such products and services themselves, they will be in deep trouble. It’s as simple as that.
For example, a bank customer can agree to a price comparison website accessing their current account transaction history to analyse their spending patterns and suggest a better account or overdraft based on that history.
Before long customers may be using Facebook or Google to pay bills, making P2P transfers and analyse their spending, and this will allow these third-parties to build financial services on top of banks’ data and infrastructure.
Gone will be the days when banks only had to worry about the competition from other banks. Soon they will be looking over their shoulders at any provider of financial services. This will fundamentally change the whole payments infrastructure, creating a revolution in the profitability of current business models and in customer expectations.
Threats to the high street
There are three immediate threats to the high street banks.
First, IT costs are expected to rise to provide new security requirements and the opening of APIs – the necessary application programming interfaces.
Second, it has been estimated that by 2020 9 per cent of retail payments revenues will be lost to those providers initiating a payment on behalf of the user.
Finally, as these non-banks take an increasing share of customers’ activities, banks are likely to struggle to differentiate themselves when it comes to offering loans.
By piggy-backing on banks’ APIs, non-banks can enter the financial market without the heavy compliance and infrastructure which banks are required to maintain. These new entrants can also cherry pick: they will not have to offer the full range of banking services to enter the financial market. They will be able to focus on offering just a single service and connect to other service providers through cloud solutions or APIs.
Even worse for the banks, Open Banking only marks an acceleration of trends which are already well underway. According to research by PwC, 30 per cent of consumers plan to increase their use of non-traditional financial services providers and only 39 per cent plan to continue to use only traditional financial services providers. Other research has found that 37 per cent of European consumers say they would change their bank if it didn’t offer them up-to-date technology.
Increased consumer confidence
Consumers are becoming gradually more accustomed to using non-banks for financial tasks and there is every reason to believe this trend will continue. Paypal has already been around for nearly 15 years and has become part of the digital payment furniture. One in five European consumers say they would use financial products from challengers such as Google, Facebook and Amazon.
Importantly, there are some signs that banks might be waking up to this threat. PWC finds that 77 per cent are increasing internal efforts to innovate and 56% have put disruption at the heart of their strategy. In addition to internal innovation, 31 per cent are also buying in the services of FinTech companies.
So, the banks are worried – and they are right to be worried. The threats to their existing model are many and varied and are evolving all the time. Their non-banking rivals are lean and agile and well placed to adapt to exploit new openings.
The public on the other hand, has no need to worry. They are going to be the beneficiaries of this revolution and can wait dispassionately while the banks and their challengers fight it out.
Yes, for the consumer, ignorance truly is bliss.