In my previous blog post, The Business Value of Banking APIs, we discussed how allowing third-parties access to customer data can help banks increase their market share, lower development costs, and provide a welcome boost to innovation.
Much of the recent discussion around APIs has been fuelled by the impending arrival of the PSD2 regulations, which stipulate that EU banks must provide PISPs (payment initiation service providers) with access to customer data, including account information.
Adapting the open-banking protocols prescribed by PSD2 will open banks up to new operating models that will drive strategic change and transform their business. But there is also the risk that by merely meeting the minimum requirements, banks can lose market share to competitors who pursue open banking more aggressively.
Can PSD2 Drive Your Open Banking Initiative?
Getting key decision-makers on board for new strategies isn’t always easy; PSD2 gives CIOs an opportunity to kick-start enthusiasm within their organisations and start working on some new open banking initiatives.
Coming into effect on the 13th January 2018, PSD2 forces banks to use APIs to open up their customer accounts to regulated third parties. If they haven’t done so already, most banks will need to develop or buy their own API platform to facilitate this.
A new, symbiotic paradigm for banking organisations
Traditionally, banks have been run using a closed business model, with a strong focus on jealously guarding critical assets. PSD2 turns this strategy on its head, forcing an open business model based on shared information.
Banks will now be forced to share many of their assets, such as customer and payment information, and the ability to initiative payments, with outside parties. PSD2 forces banks to find new ways of creating revenue, and require a new perspective on businesses that may once have been viewed as competitors, but are now potential partners.
A bare minimum for competitive banks?
While PSD2 can drive your initial forays into open banking, doing the mere minimum to satisfy regulatory requirements won’t be enough to remain competitive. In an open banking system, the strength of your relationships with other fintech organisations, and your ability to work with them symbiotically will define your success.
The API platform your bank develops or buys is critical to this process: banks with a better developed, more open, and easier-to-use platform will grow bigger and better relationships with PISPs. In time, these better relationships will be a significant source of revenue and new business opportunities, and it is likely that a bank’s openness will be strongly linked with their ability to remain competitive.
Embracing these changes and seeking new sources of revenue is especially important given the reduction in interchange fees that PSD2 enforces, which will reduce the profitability of many banks. New ideas and strategies are required to recoup this lost value and maintain profitability.
Transforming Your Bank with Open Banking & PSD2
Clearly PSD2 is going to have a transformative effect on the EU banking industry. Banks must be in line with the new regulations by January 2018, so the choice is whether to do the minimum to meet the regulations, or embrace the changes wholeheartedly.
CIOs have the opportunity to give their bank a substantial competitive advantage by aggressively developing their API platform and fully-embracing the open-business philosophy. With time running out until the changes come in, PSD2 can be used to create the urgency that will catalyse these changes.
Banks should start to work on their API platforms immediately, if they haven’t already – creating sandboxes and allowing teams inside the bank to start testing the system and coming up with potential applications. The better and more refined this system is, the bigger your competitive advantage over other banks.
Once the API is ready, banks should begin reaching out to external developers and fintech companies to create business partnerships that can leverage the new open model. By moving quickly, you can build key relationships before your competitors do.
Is your business doing everything it can to benefit from PSD2?back