Banking in the modern world

Pairing technology and money is very common, we are used to hearing about the vast sums being pumped into Silicon Valley start-ups. What is less common is technology and ‘money’ working together. Challenger banks, such as Monzo, are aiming for this to be a reality, by making banking transparent and simple. The emergence of FinTech start-ups has drastically increased competition in the banking space.

Challenger banks are gaining ground in the marketplace because of their agility. This agility allows their customers to access all the new services they are used to, like mobile payment platforms such as Apple Money, which enable access to digitally advanced companies, like Uber and Zillow. Challenger banks supply their users with customer focused services and offerings. Additional competition in the space is coming from other sectors such as retail and travel, with the likes of Virgin Money and the Co-Op Bank.

More regulation is entering the industry forcing banks to open up their systems, so customers can start to move their finances around third parties with ease. With these regulations new digitalisation is required, so banks are not only compliant but are able to keep up with the increasing demand placed on them by their modern customers. Many traditional banks are having to overhaul their systems and processes. If they don’t they will cease to be competitive.

Open Banking & PSD2

Open Banking will create new partnerships and collaborations when high street banks open up their data to third parties. Open Banking will not only be beneficial for the customer but will allow banks and businesses to exchange large amounts of data which will help them become more intelligent about the services they build and sell. This exchange of intelligence will increase innovation and developments in other areas of banking technology.

Banks will need a middle office system of engagement which will help with data abstraction from multiple siloed systems. Turning data into insights allows banks to provide more precise offers to their customers. Most of the larger banks are integrating or embedding Open Banking frameworks into the offers they provide to their customers. Smaller banks are simply monetizing the access for certain APIs which they are now bound by regulation to provide to other players in the marketplace.

As Open Banking becomes the norm there needs to be increased security and structure surrounding the transfer of data between partners, this is where new regulation comes in, the most recent being PSD2.

The new EU directive, PSD2 (Payment Service Directive 2), will be implemented in January 2018, and will force banks into opening up their vast databases of customer information. For banks to comply they will have to allow third parties safe and secure access to their highly sensitive data. This directive will increase innovation, reinforce consumer protection and improve the security of online payments and account access within the EU.  

With the UK looking to leave the EU in 2019, this could potentially make Brexit less effective, as the whole regulation centres around opening up banking systems in Europe. Severing ties with the largest financial capital in the world, London, in just 12 months from implementation will put a real spanner in the works.

Impact of PSD2 and Open APIs

The implementation of PSD2 will have a major impact on banking operations, IT costs will increase as banks speed up their journey to compliance. Banks such as HSBC and RBS have allotted billions of pounds to undertake digitialisation. However, there is now a very short timeline for implementation, less than a year, which means all European banks must have a compliance plan and allocated budget towards getting legacy systems up to speed.

To comply effectively and efficiently, banks will have to innovate and create safe and secure systems using new technology, such as Modularized Systems, which forms part of SunTec’s middle layer. These systems act in a similar way to a honeycomb, each transaction and API is siphoned off into its own chamber, thus preventing third parties access to the bank's entire data set.

Additionally, once this regulation has come into play, the need for PISP (Payment Initiation Service Provider) will be lost. PISPs are the service providers initiating a payment on behalf of the user, of which banks are one, meaning banks will no longer be able to gain revenue from this, costing them 9 percent of retail payments revenues by 2020. Banks will now need to find a way to diversify, one suggestion is they start to monetise the data they have in their systems.

Off the back of this, companies which were not in the FS space can now enter the marketplace without being held back by heavy regulatory compliance which has burdened the high street for decades. There is growing trust in non-traditional banks, as customers are receiving personalised deals and offers.

The largest result of PSD2 will be the opening of the entire financial services industry, meaning that many traditional banking and FS companies will see major changes to their revenue, customer base, partnerships and even their culture.

The future of PSD2

The future of Europe and the UK is uncertain but this regulation will enable billions of new transactions to occur in an open financial marketplace. Even with the threat of Brexit looming, it is unlikely the EU will close down a new regulation after it has been put in place. This could result in strong commercial relationships between European countries and the UK after it has left the EU.

Increased competition in the financial market will enable greater innovation as banks fight for their customers, against each other and the FinTechs, as they strive to be customer centric. In turn, the customers will see improved service, as these companies upgrade their technology and overhaul their product focused mentality. Who do you think will be the victor in this battle?