In 2001, Microsoft settled ongoing litigation with the Department of Justice by agreeing to share its Application Programme Interfaces (APIs) with third party companies. This gave access to the industry-dominant Windows operating system, allowing competitors to offer complementary products and creating the opportunity for seismic change.
Now, in the banking sector, we are entering a period with similar potential, one created by what has been called the biggest single disruptor for the industry: the 2nd European Payment Services Directive (PSD2). PSD2 removes barriers, opens up new opportunities and carries the promise of transforming an area of business that has, for decades, been the preserve of banks.
Dodd-Frank rules have already set a precedent for increasing focus on the protection of the consumer, pressurising banks to use agreed tariffs up front by mandating transparency around fees. PSD2 adopts this drive, but goes further, forcing banks to open up their customer accounts infrastructure to third parties for the first time. Mirroring the Microsoft experience, it is the banks that will have to develop the APIs needed to provide the gateway for such third party access.
By mandating this change, PSD2 is opening the door for entirely new services to be created by new players within the established, regulated sector.
Understandably, this has provoked considerable apprehension from the banks. Unable to prevent third parties accessing their customer accounts (where the customer has consented, of course) the established providers can envisage a scenario whereby they are cut out of what has been a lucrative business. Losing exclusivity over the customers’ point of access to the financial system conjures a spectre in which banks are confined to the backstage, operating as back-end infrastructure providers that facilitate transactions executed by their new competitors.
Banks have the chance to swim with them and position themselves as ready to build new business types and embrace innovative partnerships.
Naturally, banks will be mindful of who they deal with under this new regime – traditional concerns around confidentiality and unauthorised access providing for legitimate objections. PSD2 provides some degree of clarity to the banks here. A line has been drawn between entities who are being brought within the regulatory framework and have a right to that access, and those which remain outside. The hoped for outcome is an increasingly competitive market which promotes efficiency while maintaining robust standards. As such, a dim view is likely to be taken of institutions that contrive unnecessary restrictions which serve themselves rather than the consumer.
Instead of seeking to hold back the tides in this manner, banks have the chance to swim with them and position themselves as ready to build new business types and embrace innovative partnerships. This attitude shift is clearly already underway from a banking sector which now realises the benefits brought by tech-savvy companies and nimble FinTechs.
For example, with the European Banking Authority not set to announce the related technical standards which the new services will need to comply with until shortly before the Directive is implemented, the agility offered by tech companies could give them a major advantage. However, these tech companies will still need to get regulated and win the trust of consumers when it comes to handling their data; the field seems set up perfectly for collaboration.
Whether new services are indeed delivered collaboratively, retained by the banks, or provided by new entrants acting alone, one certainty is that the consumer’s interests are being looked out for. With the incentives placed on the banking sector to innovate, and on the tech companies to submit to regulatory oversight and tighten up their controls – let’s not forget that such companies will still be the legitimate subject of extensive due diligence from any partnering banks – the consumer stands to benefit from greater choice, transparency and protection.