While FinTech folk salivate – and the big banks bloviate – about PSD2 and the open banking reforms coming our way in 2018, we wondered whether those outside of this bubble will actually notice? What does PSD2 actually mean for customers?

What is PSD2?

The second Payment Service Directive (PSD2) is an EU Directive to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). The aims of the directive are to:

  • Level the playing field for payment service providers, including new players
  • Encourage lower prices for payments
  • Make payments safer and more secure
  • Protect consumers

It aims to achieve this by opening up access to payment services and transaction data via open APIs available to regulated third parties. This will give better access to data and the desire for better competition to open and drive innovation in the market.

What is open banking and why should consumers care?

The average person has never heard of open banking. In fact, a recent Equifax study revealed that, out of a 2,000 person sample survey, 90% had not heard of the initiative. I can only assume they conducted it in Canary Wharf to get even as much as 10% that had heard of open banking.

Most people don’t give a damn about APIs and platforms. They care about the jobs to be done and what they need from their bank to help them achieve this. They want visibility on short-term day spending, month-to-month bills, and longer term goals for investment, such as university or retirement, and that is without touching upon people who run businesses. Open banking initiatives will free data and payment capability to allow newer entrants and forward-thinking incumbents to tackle these problems in new ways. Will customers care about this?

Will customers notice the changes?

In January 2018, when the directive first comes into place, the mainstream financial services customer will probably notice very little indeed. However by January 2019, a very different set of financial services ecosystems will have started to form. They may take a while to shape, settle, and populate but change will be afoot. A new breed of competition should see a wholesale improvement in services offered and available to customers from all walks. That is why so many are excited about this change, as customers will get better products and services. That feels good to know.

Sharing precious data

The Equifax study mentioned above also says that customers don’t want to share their banking data. However, customers have become used to sharing personal data when asked for permissions to connect apps to Facebook or Twitter. The interaction of linking transaction data to third-party services will not differ wildly from those that have gone before. However, people haven’t generally seen this from banks and financial institutions. How the digital interfaces of the future broach asking users for data will be important to creating this shift in behaviour. Customers seemingly trust sharing their Facebook data with third parties, whether rightly or wrongly, but they have long been told to keep everything to do with banking a secret. How this consent is handled will be key in getting people using these service.

Why would I want to share my data? My bank already has an app

The reason to share your data with a third party is better products and services. Another key issue is that the majority of people do not have their accounts with one bank. These new services will allow customers to manage their finances in one place. So you can link in data from Lloyds, Barclays or HSBC all into one place. The links will operate automatically and in near real time. When money goes in our out of your accounts these new services will be notified. This will allow families to better manage their money. My wife and I have a joint account with HSBC, and personal accounts with Barclays and Lloyds. We also have separate accounts with Tesco and Lloyds for shopping and fuel. Services that can help us pull together this picture more clearly will be very valuable to us.

90 day renewals – make or break for customer experience

The way these links are proposed to work however are not perfect. PSD2 requires that links to people’s third-party services expire every 90 days. How these interactions work will be the making or breaking of open banking. Some banks will want to keep the renewal process cumbersome for security’s sake, or a pretence of security, aimed at crippling the effectiveness of the changes. Others will want to make renewals as slick and smooth as possible to ensure people keep using them. We’ll have to wait and see whether the renewal process means a great deal of drop off from users.

Open banking: for some a stepping stone to digital banking

Open banking should be about more than one all singing and dancing mega service, as much I do want that. I also want to see this change make simpler niche services. For example, my parents are reticent to use online banking at all as they fear making a mistake. The data sharing that comes with open banking means they could easily have a read-only app – a gentler on-boarding ramp to digital banking.

One UI to rule them all

The most obvious battle royale will be the fight for the best banking user interface. A chance for customers to finally be able see all their financial services in one place, not only their own but perhaps their families, too. They’ll no longer be limited by the holdings they have with one institution. So which players will win? It will come down to which company can best persuade users to share all their data with them. Which company can show customers how valuable and useful their data truly is? Which company can make people feel safest?

The banks are well placed to do this, of course. They already have trusted relationships and they already have digital interfaces. But are they good enough, and will this ‘data freeing’ mean new challengers are better placed to deliver far better digital services? That is the fear of many traditional banks and the hopes of many FinTech startups. For customers, this should be a win-win scenario as competition between the two can only drive improvements.

Moving beyond current accounts

Companies like BUD in the UK are hoping that they can provide services more akin to a private banker for the masses, by bringing their finances together in one place. Not only your current accounts and savings but all other aspects of your finances too. The real time data from current accounts is likely to start the trend for open data access to other financial products.

The open banking measures do not cover all financial data just yet. It’s mainly current accounts, meaning that credit cards, savings, and investments are not bound by PSD2 and therefore will likely not feature. Will this limit the power of FinTech firms to deliver enough information when holding banks may actually have more customer information? Or will smart companies open up as they see their products needing to become relevant in this new world? We wait till January 2018 to find out.

‘PSD2 is part of the great unbundling of the banks. Consumers will be freed from bank’s walled gardens and will be able to build to seamlessly manage best-in-class financial products from multiple providers.’
– Dave Tonge, MoneyHub.

Comparison revolution

PSD2 also offers potential enhancement to comparison engines. These are heavily used by mainstream financial services customers, especially for services like insurance, think Money Supermarket or Compare the Market.com etc. Whether customers will be willing to hand over more data to allow more targeted deals to be provided remains to be seen. Again it will be in the service design to ensure a simple and smooth handover process and a clear articulation of benefits to the consumer for handing over their details.

The Competition and Markets Authority’s (CMA) involvement in the PSD2 legislation will mean there will be a much greater focus on helping people compare apples to apples in banking products and services, fed by open data. The banks have fought commoditization for years to avoid this because they are at pains to tell the world all how different they are, and they don’t want to be compared on something so unimportant as price! This change to the status quo can only be of a benefit to the average consumer

Lessons from past experience

The Midata initiative, a precursor of open banking that aimed to free usage data in a number of industries including banking, launched very quietly. It failed to deliver on its promise. In banking, the ability to download and use a spreadsheet containing 13 months of redacted transaction data in one download was of limited use to automated digital services and as such very few people actually used it which meant no ecosystems of services formed around it.

These new automated services remove the need for manual intervention and effort on the customer’s part. As long as the consent model created to get customers to share their data is well designed and clearly understood by customers, then there is no reason to think this (unlike the Midata initiative) will not be a success.

Empowering individuals

A lot of the talk around open banking focuses on what companies will do with their data. For me, it is about what individuals will build and there are a few more questions that still need answering. For instance, it is not yet clear from either the CMA or PSD2 measures what rights an individual has to use their own data. Do they have to become a regulated AISP (Account Information Service Provider) to hold and use the data? I don’t remember having to be regulated to use the Midata extracts. Real innovation will likely come from individuals just being curious and solving their own niche problems in their own unique ways and making products that do not need a business case to earn the right to exist. “I have API therefore I make”, if you will.

Problem solving with data visibility

We need the utilitarian apps to help metropolitan elites see the action of their spending, so they can cut down on flat whites to save money to buy other consumer goods. Additionally, we hope a few real world examples solving real world problems will emerge. For example, to help single-parent families juggle a myriad of financial challenges or multi-generational families balance the needs of teenagers and elderly parents. This data and payment capability is just a first step but it enables many different sets of eyes and brains to think about how it could apply to solving the wildly different problems of wildly different people.

In conclusion, PSD2 is a change for the better for consumers

Whether customers come on board remains to be seen but I am of the opinion that great products and services will rise, and the general standard of banking interfaces will also need to rise. That means open data and APIs will have made life better for people and from a customer’s perspective, should be viewed as a positive.

 

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