The benefit of having such a range of perspectives in the room was that we had a really great conversation, that I’ve heard, those more familiar with the topic of PSD2 than I also enjoyed. The (anonymised) highlights of that conversation are captured below with any direct quotes captured in italics.
Look out for new customer sweet spots
Put very simply, the change in regulation breaks the banks monopoly on their customers financial information, forcing them to make information available via open APIs to third party providers, who, in theory will use it to offer these customers better services to manage their finances. What is not so simple is that this change has the potential to break the current payments value chain and prime current account model, challenging the profitability of existing business models and opening the floor to any third party to provide a better experience (amongst other things) to the banks customers. For example, this information could be used by a third party to give retail customers the information they need to easily compare current accounts and mortgages, or to provide SMEs with an easier way to share their financial data with other account or reconciliation service providers.
Put that simply, it might seem that there is an open goal to be taken advantage of by fintech. But, as we discussed on that evening, beyond the obvious technical and security challenges, there are is a change in mindset required if this regulation is going to deliver the intended benefits to retail consumers and SMEs any time in the near future.
PSD2 will force the banks to change
Obviously the banks also have a role to play in contributing to the success of the change in regulation, however improving customer experience, goes way beyond demonstrating basic compliance. In fact this less than welcome change, could prove to be a trojan horse for the banks, forcing them to get used to the fact that their customers may simply be better serviced by a third party.
Of course the idea of their customers getting a better experience elsewhere is extraordinarily irritating to banks, not least because, it’s not like the banks are bereft of new ideas as to how they could leverage these changes to benefit their customers. It is more, as described by one of the banking representatives at the table, that existing technology, organisational and operational debt stood squarely in the way of bringing these ideas to life in the form of great consumer products and services to their customers.
So why the trojan horse? We’ve said it before and now even our retail bank participants were saying it - the universal banking model is one built for a simpler time that has been exposed as both risky, expensive, difficult to win at and creating the aforementioned technology, organisational and operational debts that these organisations are struggling to pay. PSD2 could be just the trigger the banks need to try something new, with someone new.
Building a great consumer product is passion play
Further, the view from the fintech crowd in the room, echoed by those from retail banks looking to build new products was that building, launching (and maintaining) a great consumer product is a passion play, so even if the right kind of agile team could be formed to design a great new open banking product and prepare it for launch, there remains a view that banks aren’t set up in the right way to nourish and grow great new consumer products.
There are any number of reasons for this. One is that, status quo, compliance oriented incentive structures aren’t conducive to the kind of trial and error methodology that is required to build and test a really great consumer product. The risk profile is all wrong.
Another is the difficulty of building a product when there are 20+ teams (and no one owner) involved. Think about it. If you’ve got some fantastic ideas about how to make the best use of this new standard, but you can’t move quickly enough to execute on these ideas because of all the opinions, or every new idea comes up against a brick wall of no, after a while your passion starts to wane.
But there are ways around these issues, as a number of our banking attendees shared how they are looking for ways to take the build and launch new products outside of their organisation and only bringing them back inside the organisation when they are successful enough to defend themselves.
It’s an issue of scale
In the room that evening we had a number of fintechs who are changing the banking sector by their use of technology to deliver improved customer experiences, but also by the tone and candour with which they engage with their customers.
But as we discussed, the big challenge for fintechs in taking advantage of the changes that will come via PSD 2 is taking their ideas and their companies to a scale that will be profitable by improving retail and SME customer experiences. And of course scale breeds complexity, the likes of which these nimble organisations have never seen - unless of course they worked at a bank!
Don’t make any assumptions about timing
There was no denying that fintechs have proven they can make the financial lives of early adopters better. But there is also no getting around the fact that, mass consumer adoption is going to be slow. Combining status quo bias and the rate that fintechs are scaling up, it will could be many, many years until the majority of retail and SME customers actually feel the benefit of these changes.
Another way is on the way
This other way doesn’t just rely on fintech coming up with all the (scalable) solutions, or on the banks to change their entire business model, legacy systems and all. It’s obvious when you think about it but neither party can go it alone. Many of our attendees agreed, it’s likely that some form of collaboration will both help banks pay parts of their debts and help fintech to scale to a level where they can really change the standard of customer experiences sector wide.
As one of our retail banking attendees put it, “to make this work requires that the banks resist the urge to defend against the wave and take the opportunity to think differently about ways to ride it.”