Open Banking Goes Live: The Walls Around Traditional ‘Old Style Banking’ Are Crumbling Down
January 13, 2018 may well be remembered as the ‘beginning of the end’ of the traditional retail banking industry.
Thanks to a profound set of new rules by European regulators and the UK government, we may see the start of an era where consumers no longer hesitate to change their bank accounts or make more personalized arrangements with regards to their finances.
If all goes to plan, when the dust settles a new era of banking will emerge, where existing banks can no longer take lifelong loyalty from account holders for granted. Consumers will be encouraged and ‘nudged’ to explore new financial services propositions. New, non-banking companies will launch services based on access to existing bank account information, packaged to suit emerging demands of consumers – particularly those who cherish real-time information on the move, and who expect their finances to be integrated with and supportive of their day-to-day lives.
Businesses will benefit as it becomes easier to get timely access to funds, and government authorities will celebrate as GDP growth accelerates, and new lines of digital productivity are created.
The challenge of renewing long-standing infrastructure
But even the best laid preparations for infrastructure renewal don’t go exactly according to plan. I remember a story from last year about the attempt to demolish a dilapidated sports stadium in the U.S. city of Detroit. Video footage shows puffs of smoke encircling the Pontiac Silverdome after a partial implosion, however, the structure remains defiantly intact. The demolition company later said 10 percent of the charges had failed to go off, but never mind, the building should fall on its own – although it’s unclear when that will happen.
The day the new EU Payments Services Directive (PSD2) initiative goes live will obviously not be as visually dramatic as a stadium demolition. And the go-live of UK Open Banking on the same day is unlikely to captivate get TV viewers with its narrative, even if it is presented as a battle between the modernizing forces of renewal versus the stubborn inertia of an old infrastructure.
But January 13 will be remembered as the day regulators started to bring down the walls around traditional financial institutions.
Both the new EU Payments Services Directive (PSD2) and the UK Open Banking initiative have led existing banks to co-operate with third-party companies, which from now on will be allowed to operate financial services on behalf of consumers. These new companies will be able to access account information and to perform transactions on behalf of consumers, obviously provided they are granted explicit permission from the account holder.
Over the next few months, we will see new providers offering so-called ‘account aggregation’ services. Those of us with multiple bank accounts will be able to access all our private financial information in one place, without the need to log into separate applications. These providers are also expected to offer comparison services, showing fees, charges and features of different products. If consumers adopt these new services, our relationship with banks will eventually change.
We are also likely to see major retailers experimenting with new payment methods. As more of us become familiar with mobile apps and ‘in-app” payments, it seems natural for retailers to offer a ‘pay direct-from-bank-account option,’ particularly if this is more convenient and if loyalty offers make it more financially compelling to do so.
Is mass market adoption on the horizon?
How quickly will all this happen in the mass market? It may be difficult to observe whilst the dust settles around Open Banking; those in charge may be justified in saying ‘we pressed the plunger and most of the charges went off, but it’s unclear when it will all fall into place.’
There is also the danger that the inertia in traditional banking is not only down to the behavior of traditional banks. Citizens and consumers also have well entrenched behaviors and expectations. Academics and business observers will sometimes refer to the “Behavioral Economics” of change to explain why outcomes do not always go to plan, even when new incentives (financial or otherwise) suggest that consumers will flock to new products and propositions.
These behaviors are often based on powerful cognitive biases based on loss aversion. People will tend to carry on doing what they have always done, unless they are more effectively nudged, educated and better incentivized to change.
January 13, 2018 certainly doesn’t signify the end of banking and there is nothing to stop existing banks from becoming account aggregators themselves. But there will be few events in the retail banking industry as profound as the go-live of Open Banking.
Regulation mandates the open ecosystem in the short term, but there’s value in going beyond the basics. Find out more about how building a truly open payments platform puts you ahead of the competition when it comes to generating new revenue streams: www.aciworldwide.com/open-payments
Related Blog Posts
European Banks Have the Right Tools to Stay Ahead – But Will Big Tech Overtake?
Open banking and immediate payments have come a long way, according to the panellists who joined me during the ‘Open Banking in an Instant World’ session at EBAday in Stockholm recently. The building blocks are now falling into place through the introduction of national and regional schemes, open banking initiatives, regulations such as PSD2 and the acceptance and use of APIs.
Checkout Optimization Challenges: Top Tips for Online Merchants
As the current conference season draws to a close, it’s time to reflect on one of the key topics topping the agenda for many online merchants: checkout optimization.
How Banks and Acquirers Can Deliver on the Benefits of PSD2 SCA Exemptions and Differentiate Their Merchant Services
PSD2 is an opportunity for acquirers to differentiate themselves by delivering improved services to their merchants, if they implement modern solutions to manage SCA exemptions. This will drive the best customer experience in combination with regulatory compliance.
How UPI is Driving India's Shift from Cash to Digital Payments
The Indian economy has traditionally been heavily dominated by cash, while experiencing low adoption of various online payment systems including National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) and inter-bank mobile payments. The dominance of cash is evidenced by the ratio of cash withdrawals at ATMs vs debit card usage at Point of Sale (POS)—ATM transaction volume is more than 2x greater than POS.
Cooperation, Consultation and Collaboration Are the Keys to Countering CNP Fraud in Australia
As Europe, and other parts of the world ramp up for regulatory changes around PSD2, Australia is about to launch its own strategy to combat Card Not Present (CNP) fraud.
PSD2 and Strong Customer Authentication – What's in Store for Merchants?
With the final pieces of the Payment Services Directive (PSD2) puzzle coming together, payments businesses are highly focused on meeting their compliance obligations. But the forthcoming changes will affect everyone in the payments chain – and it’s important for merchants and PSPs to understand the practical implications for their businesses and customer relationships.
Transforming Telecom Companies in a Retail World
The recent MVNO World Congress in Amsterdam brought fascinating insights into the changing telecom industry, particularly around the opportunities that lie ahead for Mobile Virtual Network Operators (MVNOs) and how they can they can cement their position in today’s fast-paced climate.
Success Speaks: Surprising New Ways Students Want to Pay
Colleges and universities are facing the dual tasks of accommodating not only new payment methods, but also a new generation of students, Gen Z, whose expectations differ greatly from even millennials. How can higher education institutions meet these demands?
In our latest Success Speaks webinar, experts from Temple University, FutureCast, ACI and MTFX Group of Companies explored today’s payments landscape for colleges and universities, payment desires of Gen Z, innovations the higher education sector is already implementing and how schools can better assist with international payments.
Women Must Choose to Rise Up Despite Past, Current and Future Circumstances
Money20/20, Europe’s biggest payments and fintech event, was recently held in Amsterdam and featured Rise Up Money20/20, a global program designed to address the gender imbalance in leadership positions within the financial services and fintech industries. A cohort of 30 female professionals was selected to take part in an exclusive curated agenda, complete with a series of bespoke content sessions, one-to-one mentoring and unique networking opportunities.
Beyond Borders: Navigating the Challenges of eCommerce Expansion
eCommerce continues to flourish, with impressive growth figures year after year. In 2018, global online sales reached almost $3 trillion, and are expected to hit $4 trillion by the end of 2020.
Despite eCommerce taking an increasing slice of the retail pie (which could now be as high as 15 percent according to recent figures), it is increasingly challenging, with competition and cost pressures creating significant issues for merchants of all sizes.