So, what happened to banking and how did it go from being among the leaders in the development and implementation of technology to the image of being too big and too clumsy and the target of many, smaller and nimbler tech start-ups?  There are a few explanations for this including that the image that is portraited in much of the tech media is neither fair nor accurate.  Banks have been under pressure from new regulations albeit in some cases self-inflicted, shrinking revenues and years of stunted economic growth causing low interest rates that have put their margins and bottom lines under pressure.  Banks are, in many cases, the behemoths that they are portraited as and in some areas, are competing against much smaller and nimbler technology outfits i.e. Fintechs.  Payments is one obvious area where competition is heavy.  Small firms such as Venmo, now owned by PayPal, are allowing individuals (P2P) to make payments from established bank accounts to other accounts on their mobile devices that removes the need to pay your friend cash or, god forbid, write a check.  However, the banks still own the accounts and ultimately the relationship.  This provides the bank the ability to leverage that relationship to market many other products and services.

This may be changing as well, as the development of the Open API stands to provide access into the banking customer’s account and transactional information.  This doorway creates both a threat and opportunity for banks and Fintechs to create an ecosystem that takes the banking industry to a new era.  Of course, regulators never seem to be too far away from any aspect of banking these days.  The Payment Services Directive 2 (PSD2) is the new regulation that mandates that banks operating within the EU share customer transaction and account data with Third Party Providers, such as Fintechs etc. and financial account aggregators.  It is expected, though not mandated, that the Open API would assume the position as the de facto standard for this integration.

This new reality provides several paths for banks over the next year or two.  The hope would be that banks and these upstart fintech firms together would embrace this new dynamic to build a modern, customer centric ecosystem.  Banks that refuse to embrace this new world face irrelevancy in the eyes of the consumer.  Since in the EU, this marriage is being arranged by the ECB, banks will comply but may not necessarily embrace this change.  They may wait to see how competitors approach PSD2 but also face falling behind as this mandate should accelerate the introduction of new offerings and new competitors into the market. 

However, there are some serious questions remaining not the least of which are the integration protocols, the legacy infrastructure used by many banks that is not conducive to open standards and privacy concerns.  In a world where data breaches and hacking seem all too commonplace it is still not known how “open” banking customers will be to having their most private information, their banking transactions, provided to various third-parties and aggregators.  Current privacy laws and technology standards in the EU and elsewhere must be reviewed to ensure, with a high level of confidence, that this new directive does not empower nefarious individuals as much as the creation of this new banking ecosystem.  As much as most pundits and tech analysts can see the future in their crystal balls banks will need to see to the benefit, i.e. ROI, to make the necessary investments in infrastructure, privacy and security to truly embrace the potential of PSD2.