Open Banking and PSD2: New players need old players to flourish

Richard Ransom, Payments Solution Lead, Bottomline Technologies

In recent years, there have been numerous headlines hailing the rise of a new breed of financial technology players and the downfall of incumbent banks. However, to what extent has this been the case and how valid is it?

There was plenty of debate at the recent EBADay in Dublin focussing on PSD2 and Open Banking, both in lively panel sessions and on the exhibition floor.

One session, which played host to start-ups and incumbent banks alike, revealed a symbiotic realisation. Firstly, from Fintech players who are looking for bank participation in order to seize the opportunity of PSD2 and Open Banking, and also from large banks that Fintech companies can in fact help them accelerate growth.

We’re at a point where competition is beginning to evolve into collaboration. The banks at the table have seen a decline in aggressive competition from Fintech companies. From the banks perspective, they saw a reduction in the number of Fintech players applying for banking licences, as the new players see the benefit of partnering with ‘safer’ banks.

Many commentators view regulatory initiatives such as PSD2 and Open Banking as the death knell for incumbent banks and fuel for innovative start-ups to enter the Fintech market. Whilst such initiatives are putting pressure on the banks through high infrastructure costs and commoditised payments, the openness of these initiatives makes it easier for Fintech players to deliver new solutions in the cloud.

Yet something interesting has emerged amidst this tension. At the risk of becoming a ”passive processor” banks have been receptive to collaborating with innovative Fintech companies, helping them accelerate innovation and bring stickiness to their offering. For instance, in business payments, such partnerships can service customers of all sizes and secure multi-bank payment and cash management solutions in the cloud. Historically these solutions have predominantly been accessible to only larger corporates. 

Equally, for the start-up community, such collaboration creates a platform for them to test, scale, and grow their technology quickly.

PSD2 and Open Banking will undoubtedly drive change. What was clear from our discussion is that there is still much to be done in educating consumers on understanding the present risks and opportunities as new innovations emerge.

Additionally, the banks at the table also recognised that the issue of secure customer authentication still needs to be resolved before PSD2 and Open Banking can reach its full potential.

One interesting perspective from our discussion was that banks take a much longer-term view of investment of Fintech companies than venture capitalists. When banks invest, they expect to be able to integrate from the Fintech’s services into their own services. In turn, Fintech companies may prefer bank investment – if they have the luxury of choice - because they also act as a strategic advisor, as well as provide access to their customer and networks.

For those who were curious to find out what analysts see as overdue for disruption, Trade Finance was highlighted as an area of finance that traverses across many emerging technologies including:

• Exchange of information between parties (Blockchain)
• Physical supply chain – confirmation of shipment (Internet of Things)
• Real-time exchange of funds (Immediate Payments + Open Banking)

What is becoming clear as Open Banking becomes a reality is that new banks and Fintechs need to consider partnerships with established technology players and banks that have experience in providing stable services at scale, to ensure they can deliver the final end of the process – the movement of money into an account, securely and reliably.