The conversation around Payment Services Directive 2 (PSD2) is often overly favorable about the opportunities for innovative banks. The rise of fintech is probably responsible for this, inadvertently deflecting attention away from market dynamics.
In my recent report, Preparing for PSD2 and Open Banking, I too discussed the opportunities for banks to collaborate with fintech providers and increase their value proposition to customers. Using our FinTrack Analytics database, which covers 200+ articles on the latest fintech innovations, it is difficult not to be optimistic about the new ways banks could create fresh revenue streams. However, when assessing the impact of PSD2 upon current market dynamics, it becomes apparent there will be clear winners and losers.
One of the main points I raised in the report was that PSD2 would quickly unleash a wave of customer disintermediation, followed by customer acquisition and subsequently market consolidation, as the winners and losers re-evaluate their business models. The disintermediation and acquisition phases are likely to follow quickly after one another, with consolidation lagging behind as some banks struggle to come to terms with the new market environment.
The key component of this disruption is the access to accounts regulation XS2A, which permits third-party providers (TPPs) access to customers’ accounts. At the most basic level, TPPs can simply provide customers with an aggregated view of all their accounts. At the more sophisticated level, TPPs can perform advanced personal financial management (PFM) analysis and empower consumers to monetize their data, essentially making banks work harder for customers. Importantly, PSD2 permits existing banks to become TPPs, disintermediating their rivals from their customer base.
One bank gearing up to do just that is ING, which is re-entering the UK market after leaving four years ago. It has launched a free mobile app, Yolt, which works as a PFM dashboard aggregating the balances of customers’ various accounts and assisting them with analyzing their spending patterns and payment obligations. With no branches and very limited hard infrastructure (i.e. call centers), ING’s acquisition costs in the UK will be low.
Banks are perceived to have a strong defence in the face of this threat: consumer trust. Consumers like all this new innovation, but when it comes to entrusting their hard-earned money with a company they don’t know or one without an established reputation it’s a different story. 66% of UK consumers choose a bank on the basis of its reputation as per our 2016 Retail Banking Insight Survey. However, this defence only stands if the disintermediator is not a bank.
By Sean Harrison, Retail Banking Analyst