Amidst all the recent discussion and hand-wringing around the new GDPR regulations, it’s easy to forget that it was only in January this year that the updated Payment Services Directives, a set of EC-wide regulations designed to make it easier, faster and less expensive to for customers to pay for goods and services, by promoting innovation, came into force.
If the introduction of PSD2 has gone a little under the radar, a new report from PWC, in association with the Open Data Institute, argues that the effects of the Open Banking “revolution” certainly won’t. The report estimates that “Open Banking has the potential to create a revenue opportunity of at least £7.2bn by 2022 across retail and SME markets.”
PSD2 was introduced primarily to introduce more competition amongst financial services providers and to try to break the hegemony of big banks, by allowing smaller firms to use APIs to access banks’ data, and authorise transactions on behalf of customers.
In the UK, for example, the Competition and Markets Authority (CMA) has moved quickly to rule that from January, the nine largest current account providers in the UK must:
“offer standardised application programming interfaces (APIs) for current accounts to Account Information Service Providers (AISPs) and payments for Payment Initiation Service Providers (PISPs).”
This has allowed so-called “Challenger Banks” like Monzo, Starling and Tandem, to use their more agile technological and customer-focused approach to poach customers from major high street banks by providing better services, such as real-time account statements, categorising spending, and offering associated services such as payment services and international money transfer.
PWC lists 4 other positive by-products of Open Banking as reduced overdraft fees, improved customer services, greater control of data, and increased financial inclusion.
Open Banking: UK Leads The Way?
The report suggests that the UK is leading the way when it comes to interpreting and implementing the new regulations, having responded the quickest; introducing the Open Banking Standard all the way back in 2016, and setting up an Open Banking Working Group, involving most major banks and several think tanks, to discuss how shared data could be used to ““help people to transact, save, borrow, lend and invest their money”.
The report places the UK in a league of its own, followed by the EU, Australia and Mexico in a second group, and the USA, Japan and Singapore a rung further down, alongside Hong Kong, New Zealand, India and Canada.
Open Banking is also viewed as a major opportunity for tech firms to enter the financial services market. They already have sophisticated API-driven data sharing facilities, which could be easily converted into financial services now that they have permission to tap straight into customers bank accounts and authorise payments, or process data. The report also praises public transport companies, most notably Transport for London, which it estimates has generated annual savings in excess of £130m thanks to their state-of-the-art data-sharing programmes. The travel industry as a whole, and app-based services such as Uber, are also singled out for praise.
Another key trend is also highlighted; aggregation of services. Aggregation refers to “single view” services, such as a “digital dashboard” that gives a user oversight of all of their different financial products; bank account, credit card, insurance, money transfer facility; across one single platform.
Whilst highlighting the success of Monzo Bank and Revolut, which have grown rapidly to over 500k and 1.5m customer accounts respectively, and other startups, which have attracted more than £1.3bn of investment from the world of venture capital, as opposed to just £145m in 2013 (a CAGR >74%), PWC say that a lack of customer understanding of what these new fintech services mean for them, is hampering the influence of the Open Banking revolution.
Only 18% of retail customers and 42% of SMEs surveyed indicated they understood what Open Banking is, and after an initial surge at the time the new regulations were released, interest, as reflected by Google trends search data, has died down significantly.
In general, customers are just not used to switching from one banking service to another, having traditionally tended to stick with one bank throughout their lives, failing to see financial services as a product over which they have much control.
This may well be set to change, however, as the technology to save consumers significant amounts when it comes to every kind of financial service; from insurance to overdraft fees to sending money to friends and family; is already here, and it will only get better.
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