It has been seven short months since the Second Payment Services Directive (PSD2), the so-called Open Banking, came into force in the EU and the revolutionary changes promised ahead of this regulation remained precisely that: promises. Has Open Banking been blown out of proportion?
Perhaps not. Things may accelerate as banks rush to modernize and telecoms such as Orange and retailers such as Tesco build their own online banks. As Facebook, among other tech giants, and companies from industries across the board now apply for and deploy their banking licences, the situation seems to be gaining traction. Yet most consumers are still waiting to feel the benefits, and financial organizations don’t appear to be taking as full an advantage as they can from Open Banking.
The major disruption of technology on the financial sector will be felt by banks, who will, for the better, have to leave an old model behind. The good news for established banks is that they can make conscious strategic decisions to take them well beyond the recent experiments of Open Banking. HSBC’s “Connected Money” app, for example, is a welcome first step, but still doesn’t capture the full potential of Open Banking.
To truly take advantage of the opportunities this new age of banking has to offer, Financial Services organizations need to become the curators, managers and true owners of ecosystems, enhancing the value of their products.
Technology shaking the foundations of the financial world
Most value chains are fragmented. There is no single caretaker for the entire value chain in most industries. As an example, in the manufacturing sector, one supplier would provide the raw materials such as wood, a second producer would transform these raw materials into products, like chairs or tables, and a retailer would then sell these products to consumers in stores. It is worth noting that usually retailers own the customer experience as they are the only ones in direct contact with consumers.
However, the traditional Financial Services value chain is very different from this model – it is a fully-owned value chain.
Banks have traditionally been the (i) suppliers of raw materials: money, data, and competencies; (ii) producers of products such as loans or mortgages; and (iii) retailers to sell their own products through their branches. The financial value/supply chain has been this way without almost any disruption since the 1980s.
Meet the new boss
PSD2, the new European Union regulation enables banks’ customers, both retail and businesses, to use third-party providers to manage their finances. This effectively allows third-party providers from different industries to take over a part of the value chain that used to be wholly owned by banks. This is what the excitement around PSD2 and Open Banking has been all about. As new players are stepping in to become links in the value chain traditionally owned by banks, it presents not only a threat but also an opportunity for Financial Service providers. They can specialize in one or a few competencies, garnering more revenue than they ever have from these handful of specializations.
Choosing a path to walk into the future world of banking
Banks are faced with a choice: they need to decide which parts of the value chain it would be most advantageous for them to specialize in and/or own. The future financial supply chain is specialized and involves more players. If banks do not establish their own space in this new landscape, they might be pushed out to the fringes.
Some banks could choose to become suppliers of information. Fintechs can become producers, taking that information and using their more agile structure and digital capabilities to transform them into products more adapted to consumer needs. Amazon could become retailers of Financial Services, offering products built by Fintech from the raw materials of banks to the consumers.
The new banking supply chain
In this new supply chain with multiple partners from a wide range of industries working together, partner ecosystems will inevitably start to form. More banks are partnering with fintechs; tech giants are starting to step in; and telecoms, retailers and other industries are starting to form their own partnerships.
The quality of the ecosystem will become a true differentiator. Until now, banks differentiated themselves through their products, promising that their offers were more adapted and better than the other bank’s across the street. In an age of competing ecosystems with different partners as stakeholders, the true differentiator will be the customer experience offered, not the products. The ecosystem with the best customer experience, offering the right prices to each partner at the different levels of the value chain, will win against the competition.
The banks able to become the curators of these partnerships, at the retailer level will become true customer owners. However, choosing this path depends on the bank’s competencies and needs to be a conscious decision.
A time of strategic choices
It feels as if Fintech start-ups have been disrupting the banking sector forever. Many assert the “old guard” Financial Services organizations will fail to adapt and face imminent death. The truth may be a little more nuanced. Challenger banks and Fintech startups seem to take off rapidly but hit a glass ceiling quickly. In fact, traditional banks dominate PSD2 and the concept of Open Banking have opened the door to the emergence of a new divided financial value chain, irrevocably redefining the roles of the financial players. Currently, banks are partnering up with Fintechs to gain competencies, and are making tactical choices that, while seemingly going in the right direction, do not tackle the challenge at its root.
Changes in technology and the introduction of PSD2 and Open Banking present an opportunity for banks to consider changing their strategy. They can disrupt the traditional financial value chain by creating their own ecosystem and become curators. At a time of change, tactical non-engaging decisions will be of little benefit. It’s time for banks to make strategic decisions.