PSD2: An innovation springboard for banks

Whilst we’re only a few days into the PSD2 era, which aims to accelerate digital disruption and reshape the financial services industry across Europe, incumbent European banks already have a clear choice to make. They can either settle for what’s to come and risk being outmanoeuvred by direct and new competitors, or actively look for opportunities to change their own path and use it as an innovation springboard.  

But for those that are looking to reap the benefits from this new regulation, what are the main opportunities and challenges they face?

The data road to customer enlightenment

Central to PSD2 is that it requires banks to give third-party providers’ access to customer information, in a regulated and secure way, to enable more innovation and customer choice. Yet, while banks may see this as giving away that hard earned customer data and trust, the reality is that by offering more transparency, customer trust is likely to grow.

Thanks to the power of data, we live and work in a time where business decisions no longer have to be guess work. Organisations, financial or not, can use data to gain valuable insights into customer  behavior and preferences, and in turn offer a better and more personalised experience.

When it comes to PSD2 specifically, access to customer data means apps and online services can access information such as customer spending habits and use this to recommend better deals. For example, a customer may have a mortgage with a bank that gives them cash back each month, but by switching to a different provider, the outgoings may be less than the difference that the cashback offers. Or, a customer has been with the same broadband provider for years, and access to their banking details could allow a different provider to offer a seamless and cheaper option to switch, in turn helping the customer save money.

The future’s bright, the future’s partnering

Yet despite all the great possibilities that PSD2 can bring, the future success of the regulation relies on one thing – banking customers agreeing to give their data to third parties. While customer data may be the key to PSD2, in light of multiple high-profile data breaches across the world, customers are rightfully concerned about who has access to their information and what will be done with it.

PSD2 should ease these fears by helping to strengthen a system security through the addition of requirements for strong customer authentication and secure communication, as well as increased supervision of payment institutions. It will also boost transparency by prohibiting the use of non-transparent pricing methods for international payments, making it clearer about the costs involved for consumers. It will also enable new payment services, with the aim of offering multiple methods for consumers to use – depending on the scenario they require it for, be it payment of a bill, sending money to a loved one abroad or buying a gift.

In order to further ease these concerns, we are likely to see moving forward new partnerships being formed between fintechs and traditional banks, as they look to offer the security and innovation that consumers are looking for. Banks have the trust built up from previous experience and fintechs can offer the innovation that consumers most associate with them. It’s the best of both worlds for consumers. The end result is that it should provide a better customer experience. But while all of this may sound good, adoption will only take place if these benefits and protections are communicated well enough.

PSD2 really is set to be the game changer that many predict and banks should see it as an opportunity rather than a threat to their position. For incumbent banks which have taken a bit of beating in recent years, PSD2 should be seen as an opportunity to grow customer loyalty, by offering more services and options. The most interesting thing to see will be how the banks react and which road they choose to go down, do they innovate, partner or risk losing out altogether? For consumers, it can only be a win-win situation – either banks improve their innovation, which improves their service or they can go to the new players on the block. One thing is for sure, now 13th January 2018 has passed, the banking industry will never be the same again.