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Before we begin to discuss PSD2, let’s remind ourselves why banks exist in the first place.
Banks look after our cash for us. Sometimes they charge a small fee for doing so, and sometimes they request permission to use our deposits for the sake of their own returns, promising to pay us interest for the right to do so.
So far so good. We can all agree that storing our money securely with a bank is preferable to storing it under the floorboards, if only for security reasons. From a bank’s perspective, it is also win-win. Even if we end up owing the bank money, we will incur charges carefully computed to ensure the bank still makes a profit from our business.
After that, things can get more complex, because banks are always trying to find ways to make more profits, which tends to mean getting “creative” with other people’s money.
But let’s stick with the basics for now. Which bank should we choose?
We have become accustomed to using the same bank for our entire lives – a relationship that is unique in its longevity. We switch our doctor, dentist, gym – even our children’s school more often than we change our bank. Why is this?
Inertia, lack of differentiation, and the difficulty of switching accounts are major reasons. Banks all do the same thing, we tell ourselves. We won’t find better services elsewhere.
It is therefore imperative that banks project the best image they possibly can to prospective customers; trustworthy, understanding, flexible – and the best in the business when it comes to managing and investing people’s money.
But all of this will change dramatically in 2018, thanks to a concept known as Open Banking.
What Is Open Banking?
What is Open Banking? It is the key tenet of the new set of Payment Services Directives, PSD2, that came into effect across Europe on the 13th January, 2018.
PSD2 introduces regulations that will allow any financial services provider to access, with their permission, users’ bank accounts, and authorise transactions remotely on their behalf.
For a long time, the European authorities have believed that banks have had too much of a monopoly on financial services; authorising transactions, providing statements, setting up payments, transferring money overseas, providing loans, etc. etc.
But thanks to the progress made in the field of digital technology, almost any small firm or “start-up” now has the ability to provide the same services, by using Application Programming Interfaces (APIs) to access information held by banks. PSD2 is about to give the green light to any firm that wishes to do exactly this.
Why does Open Banking Matter?
So what does the above mean in real terms?
It means, for example, that now I can store all my credit cards, checking accounts, and savings accounts on the same card, provided to me by a startup, and choose which account to use when I make purchases. It means I can obtain a real-time view of my finances and my latest transactions whenever I want. It means I can tell my bank to send a sum of money to a friend or a business using a third-party app.
Open Banking matters because it gives customers more flexibility, and makes it much easier and quicker for consumers to perform actions that previously they would have used their banks for, using a third-party app or service instead.
International money transfer is a good example. Whilst my bank’s money transfer service was likely to be inefficient, charging me high fees, using uncompetitive exchange rates, and taking anything up to a week to complete a transaction, my new, more agile provider can process transactions faster, and use APIs to scour the market for the best live rates.
All that I require from my bank is its permission to authorise a payment, and, thanks to PSD2, it is now obliged to do so by law.
The Benefit to Consumers
Consumers will benefit because they will have a real-time, holistic view of all their financial activity and options. Let us give you an example, using the platform we are creating here at The Money Cloud.
Let’s say I want to transfer a significant sum overseas to purchase some goods or services. First, I need to work out which account would be best to use to make the payment. Handily, because I can see all my account balances in one dashboard, I can make a quick decision, without having to access 4 or 5 different sites, passing a different security check each time.
Next, I need to find the best exchange rate, fees, and the speediest service I can. Again, thanks to APIs, I can look at real-time rates offered by a range of curated brokers, and evaluate each for speed, fees, and rates, all in one dashboard, without having to navigate, or sign up to, any other sites.
When I have decided which service I want to use, because I have uploaded all the appropriate documents to my dashboard, The Money Cloud will take care of the security checks I must pass to register with my chosen broker.
I hit authorise, and the required payment is taken automatically from my bank.
Hey presto, I am done!
What does Open Banking mean for banks?
At this stage, what the new PSD2 regulations means for the future of banking is uncertain. But allow us to posit a theory.
Firstly, thanks to digital technology, it will become far simpler for customers to switch banks. In fact, who people bank with will become almost an irrelevance. Banks will struggle to make themselves relevant to customers – who are likely to be using branded third-party services. The “famous four” High street banks may become not much more than deposit takers who, ironically, will rely on these third-party services for business.
High street banks, household names today with giant marketing budgets, will be forced to compete for every auxiliary financial service with literally thousands of new market entrants – competition they have never faced before.
Customers are more likely to opt for dashboards, not banks, when they look for services to manage their finances, because of the extra flexibility they offer. Then, they will be able to “surf” for the services they need within the dashboard. If they are not happy with the interest rate they are getting at HSBC, for example, they will be able to switch to another bank in a matter of minutes.
The end of the banking brand?
So, could this spell the end of the “beloved” high street bank as we know it? It’s possible. When a bank boasts that they have been serving customers for over 150 years, it will mean little to a customer if they are not backing it up with best of breed products and services.
In fact, big banks have already begun to rebrand, creating off-shoot startup style companies that appeal more to the modern consumer, rather than pitch for business under their own brand names.
GAFA shows the way forward
GAFA stands for Google, Amazon, Facebook and Apple. These brand names carry serious weight in the modern world. Note the difference between the reputation of GAFA versus traditional high street banks. At a basic level, GAFA companies enjoy a reputation for being open, transparent, innovative and cool, and they are also a broad church, who have let developers offer products and services on their platforms since year dot.
To stay relevant, banks may have to start behaving more like GAFA. If they don’t, their role will be restricted to holding deposits for an aging client base. Few people will take their add-on products and services, seduced by the superior alternatives on offer.
It could be the end of the banking world as we know it – how do you feel about that?