PSD2 - 'Pop Idol' for Fintechs?

There is a dichotomy at the heart of talent shows like Pop Idol.

Catapulting inexperienced people into the mainstream music business, controlled by distributors rather than producers, typically leads to short-lived success - at best.

In the banking world, the second Payment Services Directive (PSD2) will come into effect in January, 2018, allowing financial technology (fintech) firms to act either as payment initiation services providers (PISP) or account information service providers (AISP). These new kids on the block will be able to connect to customer accounts and provide payments or information aggregation services, with the customer’s permission.

Pushing start-ups into the forefront of mainstream retail banking runs the risk of recreating the Pop Idol effect. With customers’ money at stake, the impact of fail-fast newcomers could shake confidence in the business. Traditional banks could find themselves fighting for a place in customers’ digital banking experience with brand-new competitors.

Equally, the situation could be exploited by big tech firms – Google, Amazon, Facebook – who are able to leverage their excellent experience and this new route to banks’ customers in order to disintermediate the banks themselves.

It is not enough for banks to assume their track record stands them in good stead; novelty alone will lead some customers to try rivals out.

When HSBC announced it was launching an account aggregation tool at the end of September, 2017, it was a good start, establishing itself as a bank that wants to own the customer relationship. It plans to offer several other features, including one that shows the ”Safe Balance” indicating disposable available income, ”Spend Analysis” in order to help manage cash and tools to help guide better spending and saving.

Some market commentators have played down the importance of this announcement. Account aggregation tools were an early idea for Internet banking. The most famous was Yodlee, founded in 1999, and Moneysupermarket launched one in 2003. However the ”screen scraping” technologies available then have given way to far more sophisticated systems and PSD2 will allow direct feeds to aggregation tools. In addition, the use of digital technology by consumers is so pervasive that tools such as these have a clear market.

For HSBC’s customers, this will represent the ability to manage risk on an informed basis. Helping customers become their own risk managers plays to the strengths of the data and systems that they have and breaks them away from a marketing war.

To compete on a field pitched in their favor, banks will need to become platforms that can draw upon their resources, form them into services and then provide those services directly to customers. Being product focused will lead to one-hit wonders allowing the new entrants to compete on similar terms.

The move towards a platform model and away from a product-led approach is not easy. Legacy technology is built around products and that implies that the data and risk models which underpin those products will be siloed away.

In taking control of the situation, banks must build offerings that fit the PSD2 universe and move beyond anything that the fintech or big tech banks can deliver. Under the covers they must build a digital offering that allows them to unpick the complexity of their legacy systems and deliver a user experience that will keep customers coming back.

On the high street they will have to get much more creative. If they want to retain the customer relationship over the long term, they must show the value that they offer. Being a household name, like a Pop Idol, is increasingly easy to achieve. Building a strong back catalogue is far harder, and ultimately more rewarding.