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Payment Services Directive should be a timely spur

By Ben Robinson 28 Apr 2016

Digitization offers banks the chance to recast their role as one of a trusted advisor to customers, but they need to act quickly before EU legislation potentially cedes that opportunity to others

The digital revolution has moved from existential threat to potential survival strategy for the world's retail banks.

The observation, revealed in our third annual study into retail banking Retail Banking; in tech we trust, suggests that banks have finally woken up to the opportunities that technology offers them when it comes to capitalizing on digitization

It is far too easy to be pessimistic about banks' futures. Non-bank players - unburdened by legacy IT, expensive branch networks, analogue processes, large headcounts – can theoretically offer better services at a lower price point and so muscle out the banks.

But that theory ignores the inherent strengths that banks retain. Banks enjoy trust, distribution, capital, scale – and lots of data. Digitization presents banks with the opportunity to analyse and draw insights from data and serve these up to customers at the time and place they need them. In so doing, they would recast themselves as trusted virtual advisors, with the all of the corresponding benefits in terms of customer loyalty and wallet share.

And this role of trusted advisor has become more valuable as financial services have unbundled. While we're unlikely to ever see the return of the single bank relationship, there is a limit to how many providers people will want to deal with. So, there is a growing role for aggregators, who can rebundle financial services for consumers, especially where the aggregator provides both the best prices as well as value-added advice.

The issue for banks is that they're not the only organisations in line to become financial services aggregators and new European legislation will level the playing field. PSDII, which hit the statute book earlier this year, requires banks to give third parties access to customer data (using Application Programming Interfaces or APIs) where this is what a customer wants. Banks have until 2018 to comply.

So pretty soon, non-banks such as comparison sites, internet platforms as well as fintech companies could have access to customers' financial transaction data, with which they'd be able to recommend the most suitable products and services. And for most of these companies, data analytics is their core competence

This is really an existential issue. If banks allow other companies to gain the initiative and become the distributors of financial services, they lose the ability to upsell and cross-sell. They cede control over pricing. They would be relegated to product manufacturers; a position for which, unlike many fintech competitors, they do not have the right cost structure

In this context, it is a surprise banks haven't put up more of a fight around PSDII. It is inconceivable that, if the tables were turned, a company such as Alphabet wouldn't have resisted fiercely any attempt for it to open up the metadata it holds on its customers. But, anyway, regulation can't be relied upon to hold back major shifts in consumer behaviour – just look at the music industry Canute-like attempts to stop online downloads.

The good news is that this might be the spur to innovation that the banking sector has been calling for and there is still time for banks to seize the initiative.

We are already starting to see examples of banks working in collaboration with fintech companies. To date, these partnerships – like the ones between Santander and Funding Circle in the UK or JP Morgan and OnDeck in the US – have mostly worked on the basis of referrals. But they will likely soon become "fintegrations" where the services are offering direct to the consumer through the bank platforms using APIs.

The EIU report also suggests bankers are alive to the risks and changes in their industry. For example, 64% of respondents believe banking will be fully automated by 2020, while 57% believe more payments will flow through fintech firms than traditional banks by 2020. Banks also seem to be making many of the right investments - in hiring the best talent and modernizing technology. And in terms of digital investment, data management is top priority, cited by 25% of respondents.

The forces of digitization, accelerated by PSDII, are coming whether banks like it or not. The time is now for banks to capitalize on their position of strength to become trusted advisors to their customers. If they don't, someone else will – with potentially devastating consequences.

This opinion piece originally appeared in Retail Banker International

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