By Andrew Hewitt, director payment & data solutions, FIS

2018 will see some of the biggest changes to retail banking in history. Since the 13^th of January, all of Europe’s financial institutions have been subject to the Revised Payment Services Directive (PSD2), impacting organisations in the continent and abroad. A significant evolution of existing regulation for the industry, the legislation aims to increase competition and drive forward innovation, while enhancing consumer protection and security.

Andrew Hewitt

Yet changes in the ownership of customer data spell tough times ahead for retail banking providers today. The core of the directive has broken the monopoly retail banks have had on their customers’ data, allowing third-party providers to retrieve information from bank accounts at the customer’s request. In the age of digital transformation, where data is everything, the loss of this exclusive right presents a substantial risk to every retail bank’s business. In the wake of PSD2, the industry faces greater competition than ever, with the door now wide open for technology giants, retailers and other FinTech organisations to compete with their own digital financial services.

Not only are established providers losing control of customer data, the new legislation has already presented some interesting technological challenges, including the requirement for banks to provide suitable interfaces for external access to account data and payment initiation.

Traditional banking services are already beginning to be either supplemented or completely replaced by digital services, and branches and personal advice are becoming less important. In the mid-term, the question of who can best assert themselves as a central service provider, aggregating customer data and providing the best tools and services to the end user, will be a decisive competitive factor.

Newcomers to the market have been received well, offering improved customer experiences and new innovative ideas at speed. Unlike existing banks, they’ve been unencumbered with legacy technology, siloed data and a range of other issues that come with trying to pivot a long-established business.

From a technological standpoint, many such disruptors have already achieved a head start. FinTechs are investing on average 3:1 in the area of payments, compared with investments from traditional banks, and PSD2 will only provide further catalyst for success. The worst-case scenario from the banks point of view would be the technology giants such as Amazon or Google utilising their vast resources and digital expertise and outstripping established providers.

Open data will allow competitors to offer individually tailored offers, new applications and services to lure customers away from their existing providers. As performance and costs become more transparent, price comparison becomes easier for consumers to find with just a few clicks, placing greater price pressure on the retail banking ecosystem.

For banks, there is real danger in losing long term business. Large margins and fees generated by financial products such as personal loans,insurance, and payment transfers are all at stake, as young, digitally savvy clientele become accustomed to expecting more from service providers from all areas in life, not just banking.

Leverage existing strengths to secure market position

Established retail banks now face the new challenge of having to regain the privilege of direct contact with customers, requiring a substantial change in business as usual.

Increasing legislation may have led to slower developments in recent years, but now is a critical time to switch to a proactive, self-disruptive approach, to have any hope of securing existing market position. To do so, traditional players should build on the unique strengths developed over decades, even centuries of doing business.

Whilst it’s true that new market entrants will benefit from the advantages presented by PSD2, they will also have to face intensive compliance issues and regulatory requirements. Banks already have extensive expertise in these areas. Data security, fraud prevention, secure digital identity and confidentiality of personal data are all core competencies of established financial institutions. Despite the financial crisis, banks also still enjoy a considerable amount of consumer confidence.

Carrying these strengths forward is key to survival in this era of change, whilst undergoing digital transformation and ensuring new innovations are deployed at speeds the industry is somewhat unaccustomed to.

PSD2 will undoubtedly change the market in the mid and long term. For consumers, there is a lot to look forward to, in the shape of smart new technologies, improved financial product offerings and greater transparency in fees. For banks, FinTechs and the wider technology industry, we are entering the make or break phase in the race to aggregate services and secure access to customers. Banks must focus on exploiting their existing advantages in order to continue to play a role in retail banking.