Payments in Times of Open Banking
The retail landscape has undergone a significant shift over the last decade. The traditional sales channels have been amended with or even replaced by digital channels through which consumers prefer to make their purchases.
Retailers had to rethink their customer engagement models and the changing customer expectations did not only affect the retail industry but most other industries where consumers are engaging with their suppliers. For a long time, the incumbent banks managed to get away with merely digitizing some of their existing paper based processes by offering online and mobile banking channels to their customers. It is only after a number of challenger banks emerged, that there was a shift from inward-out to outward-in thinking when it came to product design.
But challenger banks alone were not enough to make some of the established banks rethink their customer propositions. It took an intervention from the regulator to instigate a real change in the banking industry. On January 13th 2018, the 2nd Payment Service Directive (PSD2) finally came into force, although it would be a bit exaggerated to say that the world changed overnight. The initial reaction to this new piece of regulation when it first was announced was one of concern, not only were banks perceiving this as a security risk but also as a threat to the relationship with their customers. As the dust settled and the industry started to work through the practical implications of open banking, it soon became clear that banks would not be opening their doors to any and every third party knocking on their door – it is rather a controlled access that will be granted to third parties that either meet the regulatory requirements or that enter into a partnership with the financial institution. Only at that point, the banks started to understand the potential benefits of this evolution and that there is more to be gained by embracing this evolution than trying to fight it.
So does this mean the world as we know it has changed? Not just yet… the stakeholders – banks, fintechs, consumer organizations and regulators – established a number of industry forums, working their way through the practicalities of open banking. There still are some points on which the banks and (established) fintechs disagree, but a consensus has been found in a lot of other areas. The lack of standardization may be a hurdle for third party providers trying to set up their services and only few banks are ready at this point in time to comply with the rules laid out by the EBA in their regulatory technical standard. For payments practitioners, PSD2 and open banking has been at the heart of a lot of the work conducted over the last 2 years, but consumers are still very much unaware that open banking will soon be a reality. Some of the mainstream media has been publishing articles with scary titles along the lines of “Your bank account data is now up for grabs” and that is not at all what the industry is trying to accomplish. Making sure consumers are properly educated – and not only on the potential risks but also on the new convenient services these same consumers will soon have access to – should be high on the agenda of local regulators, banks and fintechs alike.
For retailers, open banking also brings a number of obvious benefits and PSD2 allows to truly leverage instant payments as they too become more readily available. Open banking allows retailers to build richer customer experiences by bundling loyalty and payments into one seamless customer proposition. Although larger retailers are most likely to move fist into this domain, this is equally relevant for smaller merchants and service providers will offer white labelled services across multiple merchants building on the increased digitization of loyalty and reward schemes, instant payments and open banking.
As a result of this regulatory change, the banks have gone through a significant transformation in their thinking around products and services and as the banks have learned from the retail industry how to address changing customer expectations, retailers can equally benefit from the lessons learned by the banking community. Customers are in charge of their data in open banking, and retailers can consider the same level of openness when it comes to loyalty data. But probably the most important take away would revolve around the value of partnerships. Never before have banks been as keen to collaborate with external partners in an attempt to create the most compelling customer proposition. It remains to be seen which partnerships and solutions will succeed, but it is clear that there is a tremendous potential in this collaborative approach and without a doubt, this will lead to the next generation solutions where customer value is really at the heart of the proposition.