PSD2 and open APIs are forcing traditional banks to partner with fintechs.
As digital banking transforms, it is unclear what the bank of the future will look like. But one thing that is clear is that physical branches will become less important. Online channels will increase in priority and financial institutions will focus on optimizing innovative and consistent experiences to increase market share.
A 2017 study from Capgemini and Efma, the World Retail Banking Report, explores how traditional banks and fintechs must work together to create a new financial ecosystem. Developing open APIs and improving user experience are current priorities for financial institutions. We’ve included some of our conclusions from this study here.
Traditional Banking Must Compete with Fintechs to Provide a Satisfying User Experience
Traditional banks still have significant control over their customers. Nonetheless, digitally-native financial technology companies (fintechs) are gaining ground. Fintechs have differentiated themselves by their ability to deliver personalized value to the final customer. According to the study, almost a third of traditional banking customers have some kind of relationship with them already.
This new competition is forcing traditional banks to improve their front-end experiences. By improving and increasing loyalty and satisfaction for current customers, big banks can drive retention and avoid losing customers looking for other alternatives.
This tipping point between interest and retention has been called the moment of truth. Key moments in which customers interact, through their preferred channel, with their financial services provider. The moment when a particular opinion about products or services is formed; an established relationship that develops before the point of sale. Examples include increasing the limit of a transaction, asking for credits online, managing notifications in real time and et cetera.
As technology becomes more and more important, moments of truth are becoming increasingly important online. As customers demand better services with better experiences, technology must be equipped to aid moments of truth in the customer journey. But what does technology need to do? There are four suggestions:
- Extract existing corporate information from outdated computer systems, or connect these systems, to put the customer in the center and offer better service.
- Innovate quickly by launching new products and services to the market, thereby creating new value on current business models.
- Release corporate information to the market efficiently by different web or mobile channels, through an omnichannel experience.
- Customize the content and services depending on the type of user.
APIs will change the future of traditional banking and promote open banking models.
So far we have talked about the user experience on a general level. However, the development of APIs can help traditional banking compete in a fully digital environment. In addition to developing new products and services in an agile manner, traditional banking should collaborate with third parties to create a valuable marketplace for the end customer, which is key to improving long-term consumer loyalty. According to the report, 91% of banks and 75% of fintechs expect to work together. This is notable; the expectation, even the desire, to innovate together is high.
PSD2, APIs and Their Impact on Traditional Banking
The PSD2 is the new European directive that aims to create a single payment framework within the European Union. The measure brings relevant changes to the financial sector by allowing access of banking client information to third parties. If mismanaged, enforcing the directive may mean that traditional banks lose a "monopoly" on their current customers. Without being able to meet digital demands, users may be forced to look for alternatives to manage their payments and finances through third parties (fintechs).
Although the new directive does not explicitly mention APIs, in this context APIs will play a key role. José Manuel de la Chica, Ventura Solutions Architect in New Digital Business of BBVA points out, that "although PSD2 does not speak specifically about APIs, most professionals in the technology and financial sector assume that APIs will be the technical means that allow banks to comply with the regulations." However, BBVA also points to the creation of standards in the sector of banking APIs for definitions, nomenclature, access protocols and authentication (i.e., OAuth, certificates, tokens, double factor, etc.). This is the real challenge towards a practical application of PSD2—to be really effective for transforming the digital payment media market in Europe. As highlighted by Cinco Días, PSD2 "is not only a new regulation to enforce, it is the starting point of a new open banking ecosystem."
In short, traditional banking in Europe has two options, either resist the change or lead the change. The latest movements indicate an intention to lead, and we see traditional banks are becoming increasingly open to innovation and collaboration with third parties, evolving day by day towards the open banking model.
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This post was first published in Spanish by Javier Puga.