Banks and fintechs are working together to unlock the full potential of Open Banking. But does the real benefit lie in leveraging real-time payments? writes Darryl Proctor
For years, banks and fintechs have been portrayed as adversaries in the battle for control of the financial services industry. Many predicted blood on the floor, much of it from banks. No longer. These former rivals are realizing that they have more to gain from working together. We are now beginning to see an exciting range of new financial products designed to meet PSD2, which came into effect on 13th January.
Your average fintech is young, highly nimble and has little cash and even less access to large customer bases. There are also those that have huge investment dollars, but struggle in producing a good return on investment (ROI). Banks have the customers, but need the technology developed by the fintechs. By joining forces, they can deliver better, cheaper and innovative payment solutions via APIs. Success is no longer about simply meeting the minimum requirements of PSD2; it's about providing new services to improve customer experience, build loyalty and develop new sources of revenue.
PSD2 obliges banks to make customer data available in a secure manner to permitted third parties. Yolt, owned by Dutch bank ING but licensed as a third-party provider, is a good example of how this obligation can actually benefit bank customers. Nine of the UK's biggest banks and building societies have signed up to this bank-account aggregation service which is delivered via an API. It allows users to optimize their money management by letting them see the balances of their bank accounts (from multiple banks) individually, or as a total (in a single view).
Thanks to PSD2, Yolt can aggregate accounts from different banks. In theory, having a complete view allows consumers to remain in credit by moving money into accounts with a low or negative balance. However, to enable this real value to be realized, these apps need to have payments capabilities. And, even an account transfer can be made, without real-time payments enabled, addressing low or negative balances to avoid the associated fees, is impossible. If it takes days, or even hours, to transfer money, retail customers may miss the window to avoid a fee, for example and slip further into debt. And the same applies to corporate customers from a cash management perspective. Efficient liquidity management can now be achieved by having a single view of accounts with multiple banking relationships and reacting immediately by making instant transfers; ensuring all accounts can be balanced, reducing the need for unnecessary corporate loans.
PSD2 is opening up payment services, ushering in a raft of innovations such as peer-to-peer payments and aggregated accounts. If payment apps can prove their security and ease of use, they are likely to replace cash (and cheques) altogether; with banks ultimately benefiting from greater balances and lower associated administration costs. But only if they are instant. Providing instant payments demands a modern, digital core-banking platform. One that seamlessly connects to their payments system. Of course, there's more to a digital core than providing state-of-the-art payment services. Time and again, successful collaboration between banks and fintechs is predicated on banks being fully digital. Only a digital core can be agile enough to allow banks to add new services delivered via APIs quickly and efficiently, allowing them to fully participate in the new age of reconciliation.
Darryl Proctor is Director of Payments at Temenos