The EU’S second payment services directive (PSD2), set to come into force next year, will require banks to share current account information with third parties through APIs — providing the customer gives consent.
This will allow new companies to innovate with an important data source, giving the market a much-needed competition boost.
While these innovations will be great news for consumers, many of the established banks are worried it could demote them to a supporting role.
PSD2 will make it possible for third party financial services apps to be built on top of accounts and become the main interface for banking and payments. If banks allow external providers to give a better customer experience than they can offer, they risk losing the ability to engage with their users.
However, rather than trying to limit the impact of the directive, banks would be better placed to look for the opportunities that it provides. As APIs are accessible by any company that wants to connect, they offer the possibility of new features within retail, transport, and beyond. By helping to power innovative autonomous experiences, banks have a chance to make the legislation work in their favour.
While PSD2 will force current account data to be shared, information on saving accounts, direct debits, and demographics is not included. With this being highly valuable to businesses of all kinds, the established banks have a key bargaining chip that the newer companies cannot match. The most forward-thinking banks will use this to form new partnerships and improve their services.
Monzo, a digital challenger bank, has already given developers access to its APIs, indicating what could be possible for those that make full use of their data. Its user community has built a range of add-ons including a Transport for London website integration that automatically generates travel receipts, a Nectar card balance tracker within the current account feed, and a mobile game that gives points for spending.
By working closely with retailers, banks could provide customers with tailored offers and advice based on their preferences. If an account holder buys a certain brand of trainers, the data from both businesses could be combined to predict the best time to offer a discount on a new pair. Of course, all parties will have to tread carefully to avoid appearing intrusive – but if the offers are enticing, consumers will be keen to take part.
Not all these partnerships need be commercial either. By linking with tools such as Google Calendar, Amazon Echo, or Facebook Messenger, banks can improve convenience by instantly sending notifications to remind users of payments or charges. By communicating where the customer chooses, the banks can encourage loyalty, and offer a more personalised service.
Things become complicated
The biggest test when making these partnerships is the massive levels of complexity it will create. Integrating with external applications, and presenting this in a convenient way will be a huge technological challenges.
The nimble challengers taking on the banks are not bogged down with old systems, making it easier for them to achieve a great digital experience. If banks are unable to match this level of convenience, customers are likely to leave them behind.
That said, the competition from challengers has been growing for some time, and change was required anyway.
While PSD2 is an undeniable risk for the more established banks, it also enables them to benefit from technology advancements at external sources. Building new services is expensive, and PSD2 will encourage the collaboration and innovation that the banking industry needs.
£ John Rakowski is director of technology strategy at AppDynamics.