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Innovative Fintechs Don’t Need No PSD2 Regulation

[Pink Floyd fans won’t need any explanation for this post's title. As for the others… well, it’s never too late to become fans of Pink Floyd!]

The recent buzz around Artificial Intelligence and Machine Learning has spawned the next generation of Personal Finance Management applications. While the forerunners in the cateogory like Mint (now part of Intuit, Inc.) are still available on the web, most of the new players are mobile-only. Going by monickers such as Mobile Money Management App and Money Management Bot - herewith termed MoMMA for the sake of convenience - they all require access to their users’ bank account information.

This has become a bone of contention of late with banks reminding their customers that their TOS forbid them from handing over their online banking credentials to third parties (I don’t know what took all but a handful of banks so long to assert an old clause in their terms of service - actually, I think I know, but that’s a blog post for another day).

As a result, MoMMAs have been looking to “Open Banking” regulations like PSD2 to give them a leg up. For the uninitiated, PSD2 mandates banks to allow fintechs to access banking data of customers.

But banks are not taking this lying down. According to Financial Times, big banks are lobbying to reduce access to customer data envisaged by PSD2, which would substantially dilute the original provisions of "open banking". According to Sebastian Siemiatkowski, chief executive of Swedish online payments company Klarna, quoted by FT, “If it (PSD2) goes ahead as currently written it will not create open banking as the law originally envisaged.”

Fearing an existential crisis, fintechs are fighting back.

They shouldn’t.

In fact, they should stay away from regulation. As I’d highlighted in Fintechs Need Marketers And Lobbyists – Not Lawyers and Fintechs Need Guts More Than Lawyers!, many successful startups have flourished by leveraging “regulatory gaps” rather than regulation.

Instead, MoMMAs should focus on becoming truly innovative and enhancing their value proposition.

Intuitively, everyone knows that "earn more, spend less" is all the money management mantra they need. To get people to use a MoMMA to practice this principle is a hard sell, made even harder by what's offered by the current breed of MoMMAs:

  1. Transform the customer banking experience by enabling consumers to compare and save on current accounts, … look for mortgages more easily and access better terms for loans (Source: Finextra article titled Consumers unaware of Open Banking – Equifax)
  2. Answer questions like "How much have I spent on Uber this month?" and "Can I afford to go for dinner?" (Source: Finextra article titled Personal Finance bot Cleo)
  3. Protect customers from bankruptcy by telling them to avoid that $5.00 coffee. Okay, I’m joking about the bankruptcy but the part about the coffee is true.

IMHO, these features are quite lame because:

  • MoneySuperMarket, Which? etc. have been letting us do comparison shopping for current accounts and mortgages for ages without needing any access to our banking info.
  • What can we do about the money we've already spent on Uber?
  • If we can't go for dinner, do we starve?
  • We don't need a fancy MoMMA to tell us that $5.00 for a coffee is a big rip-off anyway - even if we won't bust our budget by buying it. 

Okay then, how can a MoMMA offer true value to its users?

I can readily think of a few ways by which it can do that. A MoMMA can, for instance: 

  1. Give truly useful money management tips e.g. Earn $$$ more by sweeping X amount from a checking account to a savings product.
  2. Indemnify customers from losses caused by data breach arising out of third party access to customers’ banking info.
  3. Access only the info that customers permit them to access and prove that they're accessing nothing more, nothing less. Screen-scraping by using online banking password - currently the most widely used data access technology - fails this test. Once customers have given away their online banking passwords, they've very little visibility into what info the app is actually accessing.
  4. Make data sharing UX frictionless. OFX is one prevailing technology that lets the user download only the info they explicitly want to share with the money management app or bot. However, most MoMMAs require frequent updates of transaction info to offer valuable tips, which means users have to keep logging into their online banking portals regularly to download their latest transactions. This can be painful.

Personally, as long as a MoMMA supports the above functionality, I'll gladly start using one.

Let's look at the feasibility of implementing these features.

#1 is related to consumer behavior and product management. #2 has a legal and financial angle. They’re both within the control of the fintech, at least the well-funded one.

#3 and #4 are related to technology. As I'd highlighted in P2FM Services Walk The Tightrope Between Convenience and Security and How Many More PFMs Do We Need? (hyperlinks removed to comply with Finextra Community Rules but these posts will appear on top of Google Search results when searched by their respective titles), data access modalities have posed major challenges to the viability of the first generation of PFMs 8-10 years ago. But, all that's history now. OFX-API seems to have cracked the Holy Grail of data access, going by the gung-ho views expressed by executives of JPMorgan Chase and Intuit when they recently announced their data partnership agreement based on this technology (Source: American Banker).

As a result, fintechs are closer than ever before to being able to leverage their innovativeness to develop a compelling value proposition for PFMs. If they achieve that, they can kick out their ‘open banking’ and PSD2 crutches.

In return for a frictionless UX, tens of millions of customers otherwise perceived to be highly security-conscious make payments with India’s largest mobile wallet app PayTM without entering a single password or PIN.

If MoMMAs give them a similarly compelling value proposition, people won’t care about sharing their financial data with them – with or without PSD2.

I’m not alone in this belief. As Metia's Steve Ellis comments on Finextra, “…the question on sharing personal data is the wrong way round. No-one agrees to share personal data without being offered some kind of fair value exchange for it. Show the consumer a compelling value proposition and they will do it in the blink of an eye.”

Fintechs who're still not convinced that they should shed their reliance on 'open banking' should just pause to contemplate their future if said regulation becomes two-sided and requires fintechs to share their customer info with banks.


I'm sure they'll now agree with my call:

Hey! Fintechs! Leave Them Regs Alone.


Comments: (5)

A Finextra member
A Finextra member 16 February, 2017, 12:18Be the first to give this comment the thumbs up 0 likes

While I enjoyed reading your post, I must say I disagree to some extent. 

Yes, a lot of what fintechs currently offer is mundane or of questionable value - not to mention the often-questionable business models behind it. 

But this is a different argument than saying PSD2 will not help. If the access to account part of PSD2 works out, this should make it easier for fintechs to come up with new and innovative features that are useful - instead of devoting considerable time and effort to data access. 

Also, currently not every bank offers interfaces like OFX. In Austria, I am not aware of one (if you discount download of transactions through a web-interface). And Austria, being e.g. one of the stalwarts for cash usage among developed countries, could use some fintech push towards more digital banking 😉. So, I am hopeful that PSD2 will make a change and shake up things here a little bit. 


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 February, 2017, 16:41Be the first to give this comment the thumbs up 0 likes


TY for your comment. 

In the absence of PSD2, fintechs (e.g. Mint) have been enjoying full and unfettered access to users' bank accounts via online banking passwords. Despite doing so for nearly 10 years, they have only managed to come up with "mundane" and "of questionable value" functionality. So, PSD2 or lack of PSD2 has not been and won't be a constraint. Their lack of imagination has been the constraint.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 February, 2017, 09:06Be the first to give this comment the thumbs up 0 likes

Now, here's a fintech I can easily agree with!


Yet while many financial advisors recommend skipping your morning latte and other inessential indulgences in order to save more for retirement, Acorns actually encourages you to keep swiping your credit card in pursuit of that same goal.

A Finextra member
A Finextra member 02 March, 2017, 14:16Be the first to give this comment the thumbs up 0 likes

PFMs have a lot in common with the much more popular fitness trackers at the moment - a lot of data to draw from, but not much personalised insight.

Shaju Nair
Shaju Nair - Temenos - Bangalore 13 October, 2017, 07:35Be the first to give this comment the thumbs up 0 likes

Very intesting and very bold posting. thank you for sharing.

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