Blasting open the doors to the banks' data is PSD2

Banks always have the advantage when it comes to their customer's data. They have access to information technology firms and third party vendors only dream of.  On January 13, 2018 all of this changed for banks in Europe and the UK. 

PSD2 is forcing all banks operating in the European Union to open up their customer data to third party firms  - upon the consent of their customers.

This new law in the EU, the Payment Services Directive (PSD2), will provide non-banking firms the chance to compete with banks in the payments business and give consumers more choice over financial products and services.

So too has Britain's Competition and Markets Authority (CMA) set out similar plans to let customers share their data with other banks and third parties. With the consent of their customers, U.K. banks will be required to give authorized third-party firms access to current account data.

This is forming part of the “open banking” conceptual transition. In this open banking framework, non-banks (say Amazon or IBM or start-ups) can create new financial products using the banks data.

What does it mean for banks?

Application programming interfaces (APIs) will have to be built so that banks will be required to give third parties secure access to their back-end data, and therefore serve as tools for developers to not only get the data and build their own products around it, but also serve to understand the customer’s habits which in turn leads to the creation of new services.

The concept of open banking promotes the idea of banking as a participant value chain. The customer can choose a provider in each part of this value chain. Also – each bank has to participate as an earner’s right to be there.

Right now the banks own the end-to-end chain. Post PSD2, the banking world will look quite different.

 

Spain's BBVA, and Ireland's Ulster Bank have already published open developer portals ahead of the EU legislation; and HSBC has also made early moves toward meeting the incoming rules.

What does it mean for tech firms?

This is a bonanza for technology firms dealing in the financial industry. They will obviously benefit as this open banking framework gives access to bank data and allow them the creation of new products.

Many small lenders have been hoping for a move toward an open data infrastructure, and making banking a “marketplace” by connecting consumers with a number of products and services — including those from other providers — within their apps.

In an open banking world, you don’t actually have to be a bank. You can manage a big balance sheet and have all the proper regulations. It’s a game changer. Tech giants like Amazon and IBM are primed to disrupt banking, especially as lenders are forced to allow access to their data. Data is at the heart of all financial products and services. So companies that are very good at managing data are advantaged in this space.

Financial technology companies that are really good at customer relationship and have a really good understanding of how to manage data could be the most disruptive in this open banking framework. Let’s see – Amazon is good at that isn’t it?

Hurdles

The transition is not without friction.  Most believe the banks will be slow to respond and reluctant to comply. In some cases some banks are actually suing start-ups and trying to block them by any means.  In fact, authorities raided the offices of banking groups because they tried to prevent technology firms from accessing customer data they had a right to. It’s the consumer need that is the driving force behind the PSD2 directive and thus, will win out.

Most banks believe their customers will stick with them and not move to alternate value chain participants because of good customer relationships and in fact don’t fear the ‘existential threat’ from technology competitors.

However, HSBC along with a number of other British banks including Barclays, RBS and Santander missed the deadline for the open banking rules. The regulator granted them extra time.

The U.K. is the first market in the world to implement these significant IT and infrastructure changes, and along with other banks, are working closely with the regulators to complete the testing necessary for a smooth and secure open banking in the coming year.

Frankly, it’s still unpredictable how exactly PSD2 will look. On the subject of compiling all of a customer's bank accounts on one app, some financial technology companies were considering integrating the feature, but that they would take a wait-and-see approach.

"I think it's a huge opportunity," said Tom Blomfield, CEO of Monzo. "It's just unclear how PSD2 is going to roll out. Is it going to be smooth or bumpy? We don't quite know yet. So I think we'll play it by ear.