PSD2: A turning point for banks’ business models

By Karen Wheeler, Country Manager and Vice-President, Affinion

The last two years have been a time of introspection and preparation for European banks, as they prepare for the next step in their journey as Payment Services Directive (PSD2) is introduced. This has been a catalyst for traditional banks to urgently assess their business models, and define the future role they will have in the industry, and in their customers’ lives.

Banks are only too aware of what the new legislation is striving to do. Competition will increase, as new challengers emerge from the worlds of e-commerce and tech. From a customer perspective, the power will be placed firmly in their hands, opening up more choice and improving their overall banking experience. It’s clear that the future success of banks will be dependent on how well they can adapt and evolve to meet the needs of customers, particularly through digital channels, products and services.

Whilst change in the market is inevitable – PwC predicts that “2018 is set to be a game-changing year for retail banking”, banks have already begun to explore new models to ensure they will stay relevant to customers in the years to come.

PSD2 is set to accelerate this further, as banks adapt to the reality of the new regulation and witness how customers are responding to the changes.

Both fintechs and traditional banks embracing change

Both established banks and fintechs have already started to change their business models. In the UK, for example, the millennial-focused start-up Monzo, which started life as a digital-only banking service, was granted a banking licence earlier this year. Part of a wider trend of start-ups becoming finance platforms, it aims to become a hub for people’s financial lives by selling third-party products like insurance and loans through the app, and taking a cut of each sale.

As the next step in the start-up’s journey, Monzo now offers fintechs the opportunity to partner with it to develop their own apps and “start to build experiences themselves”, according to its Head of Partnerships Phil Hewinson. In the world of high street banks, Santander is leading the charge for fintech partnerships. Recently, it announced it’s working with fintechs Pixoneye and Gridspace to bring predictive personalisation, connected finance technology and conversational intelligence to its customer offerings.

There is a growing customer appetite for an alternative way of doing things in today’s digital world, where ecommerce and tech giants are increasingly encroaching banks’ territory. A recent study by Accenture identified a new wave of Nomad customers who are open to non-traditional banks, with 78% saying they would be willing to bank with a tech firm like Amazon or Google.

Traditional banks and challengers coming together

While there is indeed competition between the old and the new, there is a growing trend of banks creating marketplaces and partnering with fintechs and third parties to offer services through a branded platform, akin to Amazon’s in the world of retail.

By moving from a position of seeing each other not as competition, but potential partners, they can capitalise on each other’s strengths, meet the needs of today’s customers and drive forward innovation. The industry is increasingly open to collaboration; a global survey by PwC found that 82% of banks, insurers and asset managers intend to increase the number of partnerships they have with fintech firms over the next three to five years.

According to PwC partner and fintech head Steve Davies, “Every bank in Europe is now running its own incubator or accelerator for fintechs whose technology it hopes to benefit from”. In the UK, for example, HSBC has partnered with the fintech Bud to offer its customers a range of financial management tools under its online-only brand First Direct in a new trial.

Working together in this way provides a clear opportunity to capitalise on the strengths of both. High-street banks have worked tirelessly for years to build trusted brands and achieve consumer loyalty, while fintechs offer the digital agility and expertise traditional banks often lack, held back by regulations and legacy infrastructures.

A golden opportunity for banks

But challenges remain in integrating banks’ legacy systems, often constrained by regulatory conditions, with the cloud-based technology that these fintech start-ups are powered by. These complex integrations can take their toll on the fintechs too, taking up time and draining their limited resource, which can impact profitability.

Banks’ procurement protocol can also be a significant obstacle to overcome for start-ups. They often require prospective partners to have at least two or three years of accounts, which some start-ups may not be ready to offer.

Meeting the needs of customers – and standing out in an increasingly crowded marketplace – requires a constant ability to innovate. At Affinion, we recognise these challenges through our long-standing partnerships with leading global banks, including the RBS Group and Societe Generale. Through our trusted relationships and network of partners, we integrate innovative platforms, services and products to help them engage with their customers in more valuable ways.

Developments like PSD2 are forcing change for the industry. But on a global scale, this is a crucial time for banks to fuel their own innovation and clearly differentiate themselves; whether through dedicated incubators, acquiring or partnering with a fintech. With tech giants eager to occupy the role banks have within customer lives, it’s time for collaboration to be at the heart of the finance industry.