In less than six months, the second Payment Services Directive (PSD2) will have been implemented into law in all European Union member states. The Directive is a landmark moment in banking, introducing competition to the payments market and overturning the status quo.
In the PSD2 world, banks will not only compete with each other, but also with new challenger banks and FinTechs that may focus on niche parts of the payments market. According to a recent Earnix survey, 75% of respondents believe banks will have to “significantly overhaul their pricing and value models to maintain market share over the next five years”.
PSD2 formalises the regulation of two new types of payments services that have emerged in recent years: payment initiation services (PIS) and account information services (AIS). In many cases, these services will be delivered by third party providers (TPPs), although banks are not excluded from becoming providers of AIS or PIS. An important feature of PSD2 is that it requires banks to provide access to customers’ online accounts and payment services to TPPs via open application programming interfaces (APIs).
Key to both types of services is the interface layer, as it will change the way customers interact with their banks. The organisations that provide the interface, products and services may not necessarily be banks. If a bank has a good current account product but provides a poor mobile interface, it could lose customers because of that interface layer. In the PSD2 world, the concept of ‘owning the customer’ will disappear.
AIS are expected to quickly win favour, particularly with younger customers: 89% of respondents to Earnix’s survey expect that within three years of the implementation of PSD2, most of their millennial customers will use services that give them integrated access to all their accounts across multiple banking providers commonly known as Personal Finance Managers (PFM).
Once PSD2 is implemented, any brand that consumers trust – such as telecoms providers or social media networks – could become a threat to traditional banks. Banks must therefore get closer to their customers and ensure that the services they offer are superior and offer more value to the customer than the products of rival providers.
To create a closer relationship with customers, successful banks will adopt advanced analytics, leveraging the rich stores of data they already possess. In the Open Banking environment created by PSD2, data will be sourced from a wide variety of providers. The ability to quickly absorb this data and meaningfully analyse it will be crucial.
Data analytics can help banks to better understand customer behaviour and how to act on it. In doing so, they will be able to create competitive and timely offers that will appeal to different customer groupings. The idea of ‘one size fits all’ banking is another concept whose time has passed. When it comes to data, banks have an advantage over their competitors; they have substantial customer bases that provide huge amounts of data on which to draw. The rival challenger banks and FinTechs are starting from a much smaller customer base.
Banks hold the keys to success in the Open Banking environment; they have the scale to make data analysis a truly powerful tool. They can create a competitive and valuable user experience that will help them to retain customer loyalty and compete strongly in the Open Banking world.
Key takeaways – PSD2 and the bank’s journey to successful adaptation:
- In the more competitive PSD2 environment, banks will have to significantly overhaul their pricing and value models to maintain market share over the next five years
- The concept of ‘owning the customer’ will disappear and organisations – not necessarily banks – that excel at the customer interface layer will succeed
- Within three years of the implementation of PSD2, most millennials will use services that give them integrated access to all their accounts across multiple banking providers
- Trusted brands, such as telecoms providers and social media networks, will become an increasing threat to traditional banks. Getting closer to customers and ensuring services are superior and offer customer value will help banks to compete with these brands
- Successful banks will adopt advanced analytics that will help them to better understand customer behaviour and how to act on it, creating offerings that will appeal to different customer groupings. ‘One size fits all’ banking is an outmoded concept
- Banks can create a competitive and valuable user experience that will help them to retain customer loyalty and compete strongly in the Open Banking world
For more use cases on analytics in the new era of Open Banking, download Earnix’s report.