by Johnny Wyld, Director, Business Consultancy, EPAM
June 27, 2017
The revised Payment Services Directive (PSD2) in Europe is diverse and broad-ranging, and the highest profile headlines concern its requirement for banks to open up their accounts via APIs.
PSD2 is not the only driver for the Open Banking revolution, though. There are other regulatory initiatives around the world pushing in the same direction, as well as a new generation of banks voluntarily adopting APIs as a go-to-market strategy. Furthermore, and perhaps most alarmingly for the incumbents, there are a variety of disruptive business models from new players who are offering similar services to those achievable through open APIs, but delivering them through other innovative technologies such as tokenization, prepaid wallets, and screen scraping.
Despite their visionary statements and marketing campaigns, banks traditionally were not very good at demonstrating innovation in technology, channels, products, or service. Protected by high regulatory barriers to entry, they were relatively immune to major challenge, although onerous regulatory compliance also acted as a barrier to innovation and agility. As a result, regulators, banks, and, to a large extent, customers were happy to embrace a status quo in which banks focused on fine-tuning risk and profit margins on a very limited set of standardized products.
Open Banking is the latest, and most significant, driver which is changing this picture dramatically. Pushed by regulators as a way of driving innovation and competition, it’s understandable that many incumbents may see few redeeming features in PSD2 and other regulations. Fair enough: they’re the ones who will be saddled with the costs of implementation, the increased compliance implications of dealing with a new breed of intermediaries, and unquantifiable risks around settlement and reputational damage.
Four Broad, Strategic Responses to Open Banking
At a high level, there are four broad, strategic options available to banks, ranging from head-in-the-sand denial and obstruction to embracing the opportunities for growth that open APIs can offer:
Different Approaches for Different Scenarios
Unfortunately (or fortunately, depending how you look at it), there is no one-size-fits-all solution for banks. All of these strategies could deliver benefits, and a well-thought-out approach will see each bank using all of these over time in different scenarios based on products, geographies, target markets, and growth strategy.
Now, 18 months after the announcement of Open Banking under PSD2, banks, the ever-reluctant innovators, will have the next 18 months to show they have the vision and technical ability to really embrace the opportunities that lie before them.