By Daryl Wilkinson, co-founder of Lab12 Innovation and outgoing Head of Innovation at Nationwide (@DarylandHobbes)
Banking has become much more open recently, as a result of work in the industry, Parliament and across the European Union, with potential lessons for those across the public and private sectors.
In particular, the Payment Services Directive (PSD2) requires banks to share their customers’ data with anyone who holds the required licence. I cannot emphasise enough that this is a big deal. Opening up this data brings new opportunities to existing players, and lower barriers will enable new suppliers to enter the banking and payments scene more easily. Likely candidates are applications that aggregate multiple accounts, facilitate comparisons between products, allow you to switch accounts at the touch of a button, or apps that make payments and ‘do your banking’ without going near your bank.
PSD2 has received a lot less mainstream attention than it deserves. This is the single most revolutionary change that has happened in recent times in the banking industry, and the result will be an unprecedented change to customer experience. Now is not a time to bury heads in the sand – traditional banks need to consider their position and response. When the EU gives its approval (and it will), banks will have just two years to comply. Many banks will suddenly find themselves bogged down in the task of meeting compliance by making their legacy systems compatible – but this is just the distraction that could mean they miss the larger point.
PSD2 echoes the ‘Local Loop Unbundling’ regulation change in the telecoms industry back in 2000, when the communications watchdog forced BT to open its exchanges to competitors for the first time. At first the effect was negligible, with a few competitors springing up, but none that posed a real threat. Over time, though, the regulation change had a massive impact, as a more competitive broadband telecommunications market emerged and organisations had to fight harder to attract and retain customers. Quality increased and prices decreased. BT faced previously unknown challenges, and after some difficult years it eventually came back with a compelling service offering. It now faces a new challenge in light of Ofcom’s plans to force it to open up its fibre-optic network in April 2017.
PSD2 could bring similar disruption for the banking sector. Without a clear strategy now, banks are going to be hit hard by competitors who already have the user experience nailed. Only those with a clear vision of who they will be in this new landscape, and a strategy to get them there, stand a chance of holding their ground while the industry finds its new plateau. It is a time of shifting perceptions, monumental changes and experimentation. For some banks, this is where Heads of Innovation are now proving their value – slowly but steadily influencing the cultural and leadership changes needed in a post-PSD2 world while creating the new partnerships and platforms for innovation to grow and thrive.
The potential customer benefit from the regulation is what makes this story so compelling. If Midata opened the doors to more competitive banking, then PSD2 has taken down the walls and removed the roof. PSD2 will offer customers a greater choice of services, together with a means of comparison to understand their options and make the best choices.
Midata promised customers the opportunity to compare accounts, and the 10-day switch guarantee made it easier for customers to move to a new bank. But it didn’t happen. It is still too complicated to uncover meaningful differences between providers and accounts. PSD2, however, promises much greater innovation, adding a level of transparency in payment and account services, which will mean that banks have to differentiate themselves and compete in a very different market and with a very different strategy. In this new landscape, the customer will have more power and drive bigger change – forcing banks to deliver customer-centred innovation and more personalised services. How the services will look remains to be seen, but one thing is sure: customers will win from the changes driven by this regulation and that can only lead to the same being demanded of other sectors, too.
Daryl will be sharing his thoughts on innovation in the enterprise, including the opportunities of PSD2 for businesses, at Canon’s annual Parliamentary Reception on 25th November 2015.
Read the longer version of this article on the Lab12 Innovation blog.