PSD2: The end of banks’ business models as we know them?

Although January 13 was the official deadline for compliance with the FCA’s newest European legislation, the Payment Services Directive (PSD2), preparation started well in advance of this. From the get-go, the rules ignited a sense of urgency in banks and forced change upon the industry – something that has been met with resistance in the past.

As a result, we’ve seen significant competitive change. New challengers are emerging and partnering with banks, and they’re not just from the world of financial services; we are seeing it in e-commerce and tech too. It’s a whole new ballgame, and with so much choice on offer, the power has been placed firmly in the customer’s hands.

PSD2 has ultimately been a catalyst for change – forcing banks to overturn outdated business models and think harder about both customer engagement strategies and the overall banking experience. It’s clear that the future success of banks depends on how well they can innovate and evolve their models to remain relevant and meet the needs of customers, particularly through digital channels, products and services. It’s those that embrace the change and view PSD2 as an opportunity to grow customer loyalty that will emerge triumphant.

Fintechs leading the way

Both established banks and fintechs have already started to do this, for example we’ve seen the millennial-focused start-up Monzo, which started life as a digital-only banking service, being granted a banking licence last year. Part of a wider trend of start-ups becoming finance platforms, it aims to become a hub for people’s financial lives by selling third-party products like insurance and loans through the app, and taking a cut of each sale.

As the next step in the start-up’s journey to overturn traditional models, Monzo now offers fintechs the opportunity to partner with it to develop their own apps and “start to build experiences themselves”, according to its Head of Partnerships Phil Hewinson. In the world of high street banks, Santander is leading the charge for fintech partnerships. Recently, it announced it’s working with fintechs Pixoneye and Gridspace to bring predictive personalisation, connected finance technology and conversational intelligence to its customer offerings.

There is a growing customer appetite for an alternative way of doing things in today’s digital world, where ecommerce and tech giants are increasingly encroaching banks’ territory. A recent study by Accenture identified a new wave of Nomad customers who are open to non-traditional banks, with 78 per cent saying they would be willing to bank with a tech firm like Amazon or Google.

Collaboration is key for success

While there is indeed competition between the old and the new, there is a growing trend of banks creating marketplaces and partnering with fintechs and third parties to offer services through a branded platform, akin to Amazon’s in the world of retail.

By moving from a position of seeing each other not as competition, but potential partners, they can capitalise on each other’s strengths, meet the needs of today’s customers and drive forward innovation. The industry is increasingly open to collaboration; a global survey by PwC found that 82 per cent of banks, insurers and asset managers intend to increase the number of partnerships they have with fintech firms over the next three to five years.

According to PwC partner and fintech head Steve Davies, “Every bank in Europe is now running its own incubator or accelerator for fintechs whose technology it hopes to benefit from”. In the UK, for example, HSBC has partnered with the fintech Bud to offer its customers a range of financial management tools under its online-only brand First Direct in a new trial.

Working together in this way provides a clear opportunity to capitalise on the strengths of both. High-street banks have worked tirelessly for years to build trusted brands and achieve consumer loyalty, while fintechs offer the digital agility and expertise traditional banks often lack, held back by regulations and legacy infrastructures.

A challenge, but the perfect opportunity to stand out

But challenges remain in integrating banks’ legacy systems, often constrained by regulatory conditions, with the cloud-based technology that these fintech start-ups are powered by. These complex integrations can take their toll on the fintechs too, taking up time and draining their limited resource, which can impact profitability.

Banks’ procurement protocol can also be a significant obstacle to overcome for start-ups. They often require prospective partners to have at least two or three years of accounts, which some start-ups may not be ready to offer.

Whether traditional banks like it or not, developments like PSD2 are making changes crucial for future success. No good can come from keeping your head in the sand. In a crowded market, innovation has become a key differentiator with collaboration at the heart of it. Rather than trying to fight off rival tech giants, banks need to recognise that the future of the finance industry and customer engagement lies in partnership. Only then will they be able to occupy a new and more far reaching role within their customers’ lives.